Devil

“The good results of the first quarter demonstrate the strength and the resilience of the group. During this unprecedented crisis, our customers have been able to rely on (…) the complementarity of our logistic and maritime offers, in order to ensure the continuity of their supply chains. (…) We anticipate an improvement during the second quarter, thanks to our operational flexibility and our discipline in terms of cost control.”

“5.25% CMA CGM 2025 bonds [trade] at 82 if I read it ...

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  • aa d

    June 08, 2020 at 11:23 am

    Your article raises a few interesting points. But misses an important one.
    A few months ago the debt of CMA was trading at record low values as you correctly pointed then.
    And the question then was whether the company would survive the spring. Well it has quite well…Of course all is not cleared but such situations do not change completely in 3 months. The company has shown a good ability to raise cash and slash costs. And all that in the middle of pandemic of epic proportion. Impacting their business a lot.
    Whether they make + or -50 musd on business of this size is irrelevant in such conditions.

    It just shows they manage their financial communication well.

    And on that subject they have already announced that Q2 profitability will be much better. Given that Q2 is over in 20 years no doubt they are sure about it.

    The main point is they are doing ok.

    There was a window of time during which it felt as if the company would raise equity or restructure its debt in the worst possible situation. Thanks to their internal work, the level of rates vs oil prices and the French Govt loan / cherry on the cake, this window has closed for the time being. And it does not look it will open again in the next 12 months.

    • Alessandro Pasetti

      June 08, 2020 at 11:39 am

      Many thanks for your comment, antdec.

      I have always argued that a full restructuring wasn’t a base case and I think I have now acknowledged that these numbers aren’t too bad, but then the net profit turns into a wider Q1 net loss y-o-y once one-off non-operational gains from divestments are excluded, and that performance was in the early days of C-19.

      To the point “It just shows they manage their financial communication well.” – I respectfully disagree. What kind of communication are you referring to? Free money stemming from state aid?

      Re this point: “And on that subject they have already announced that Q2 profitability will be much better. Given that Q2 is over in 20 years no doubt they are sure about it.” – (I guess you meant 20 days). CMA CGM said “we anticipate an improvement during the second quarter” but it’s unclear at what level.

      Re this: “There was a window of time during which it felt as if the company would raise equity or restructure its debt in the worst possible situation.” Well, I ruled out a fully fledged recap as you probably know (see pvs coverage: https://theloadstar.com/tag/cma-cgm/), but did you notice that it had to recapitalise Ceva to finance its own sale of CMA CGM Log to Ceva, among other things?

      So, CMA is doing OK, and I broadly agree, thanks to state support, which always had to be expected – it can go on like this forever until it gets free money and parental support, I think we agree here.

      Regards,

      Ale

      • aa d

        June 11, 2020 at 7:38 am

        Hello Alessandro
        By “It just shows they manage their financial communication well.” I meant the following :
        For a company of this size with 7/8 Busd of revenues per quarter, whether they make +50 or -50 musd on a single quarter is largely irrelevant. Financial results are always an approximate calculation. There are so many variables that management can tweak by 1 or 2% of revenues easily. In both directions. It is only over several quarters that we know the reality as you can’t tweak every quarter in the same direction. In their case the fear was that with Covid and the drag of Ceva they would be at -250 or -350.
        Which was not the case at all.
        And they made sure to show it with this 50 musd profit. Which has been reported by all press articles. Which was what mattered to them for their clients, staff etc…

        On the Q2 numbers.
        I did meant 20 days and not 20 years. Sorry for the typo.
        They have been more specific than “CMA CGM said “we anticipate an improvement during the second quarter”. They have already said that H1 2020 Ebitda would be “well over” the one of H2 2019. (Cf slide 27 of the conf call) Which was 1.7 Busd. Q1 2020 Ebitda was 970 musd. It may be safe to say that “well over” means at least 10%. Which gives approx. 2/2.1 Busd ebitda for H1 2020. And therefore approx. 1.1 Busd for Q2 2020. My guess is that it is going more as the management has also said that Q2 would be much better than Q1. So maybe Q2 ebitda will be around 1.2 Busd. This would not be that surprising given the evolution of rates and bunker prices. Even if volumes will be quite down. At this number the net debt may decrease by 200 to 250 musd.

        On your Ceva point
        Yes they did have to recapitalise Ceva. Which was a bad news. Ceva has been a drag since the acquisition. Which was either unlucky or a mistake depending on how you want to judge the management.
        This recapitalization was probably negotiated with the bankers at the same time as the French State loan and was part of the package that the banks wanted to be implemented. Ceva does not bring any cash but does not cost much either now. Hopefully for them they will come of the storm stronger. Maybe not. Time will tell. Cma is a drastic and efficient operator. I would not rule them out on this one. a bit too early. Although I struggle with the price initially paid. In the grand scheme of things even if Ceva went bankrupt it would not take CMA down in my opinion. It is too small for that. They would have wasted 1.5 Busd and that would be the end of it.

        On your last point “So, CMA is doing OK, and I broadly agree, thanks to state support, which always had to be expected – it can go on like this forever until it gets free money and parental support, I think we agree here.”
        When one looks at the underlying numbers they are improving a lot. Their cost cutting program was deemed impossible to achieve a year ago by a financial analyst (Merrill Lynch if my memory is correct). It seems he was very wrong. Cost per TEU excluding bunker has decreased by 73 USD. That is a huge amount. And so yes they are doing just ok right now. But I would bet they can go on because they may do better than ok soon.
        They lack 1 to 1.5 Busd of equity for sure.
        But the French State has lent it to them for 5 years. On average through the cycle they should make at least 0.5 busd of extra CF after having paid the leases, the capex and the interest on the debt. So they have a way out which is not that bad nor impossible.
        Off course it depends a lot on the rates and the price of bunker which they do not control.

        • Alessandro Pasetti

          June 11, 2020 at 8:04 am

          Hi antdec,

          Sound and clear, thanks. A few additional considerations here.

          While you have me with regard to the $50m losses/profits hinging on quarterly revenue recognition, one point that came across from CMA was that its leader Saadé, just like Skou, promoted the idea that Q1 was a solid quarter earnings-wise when in fact, operationally, was all about damage limitation – even well before the full C-19 impact – and then the adjusted figures for both were not that great, as I argued in the note.

          Could have been worse, I agree, but bunker expenses are biting into profits more than we expected, I think, and certainly as you say volumes will be down significantly in Q2. Then, to the improvement it expects in Q2 – thanks for the clarification – Ebitda is obviously a catchy number, but that isn’t as clean as op cash flows is, as we know, and I would be more interested to have guidance on core FcF and personally, I am not that interested in the FcF disclosed by the group (which isn’t, really, core FcF). That said, your estimates may be accurate, and another quarter of a billion debt down by the end of Q2 would be another step in the right direction.

          Re Ceva, I surely agree more time is needed, the same old story. Re CMA CGM being an efficient carrier, I have always said that they are among the best in the peer group at adapting to cyclical sings, and I think this is still the case.

          Re the bears in the market, there have been many arguing for a worst case, that is right, but CMA CGM seems to be able to surprise all every time it needs to. That said, if it abided by SEC/GAAP standards, I suspect its true numbers would be significantly more disappointing. Finally, I surely agree a couple of billion $ of equity would be good news, but I suspect that will be about the size of the next funding backed by the French government as soon as Q4.

          Many thanks for the exchange and the great feedback.

          Regards,

          Ale