London-based Drewry Maritime Equity Research (DMER) has downgraded the rating of A.P. Moller-Maersk A/S (APMM) to “Unattractive,” saying it expects the company’s shipping line to navigate through “a very challenging two-year period” where a return to profitability is doubtful.
In a company research note, DMER said “a combination of container overcapacity, shockingly low freight rates and current oil prices (has) caused great distress to companies, such as APMM, until recently considered a safe bet by investors.”
While APMM’s stock has recovered 20% since the lows touched in early February as risk assets and oil complex rallied, DMER said the rally is being offset by the continued deterioration through the quarter of the underlying fundamentals for mainstay container shipping.
“Spot rates are quoting virtually at a nadir and Drewry’s channel checks suggest that contract rates have been signed at significantly lower levels than last year, severely undermining any prospects for Maersk line to return to profitability anytime soon while also posing a threat of an impending dividend cut,” it added.
Drewry said container shipping is “staring at a terrible 2016 with a structural slowdown in global trade volumes, historical low freight rates and ever increasing capacity could result in an industry losses of USD six billion.”
Rahul Kapoor and Nilesh Tiwary, analysts at DMER, stated, “We expect a very challenging two-year period for Maersk Line as the industry navigates through a chronic overcapacity and structural slowdown in global container demand. If bunker prices were not supportive, we believe Maersk line would be in dire straits financially.”
They added: “Consensus is building in a minor rate recovery this year, however, we remain sceptical and expect the consensus estimates to downgrade significantly through the year for both FY16 and FY17. Even as meaningful upside in the short term and sector recovery on the ground remain elusive, DMER believes the oil prices are guiding APMM’s stock more than its fundamentals.”
Thus, DMER has downgraded APMM to “Unattractive” rating owing to the “continued deterioration in profitability amid a challenging business environment.”
DMER regards 2016 as “a trough year for earnings and assume that the three main businesses—Liner, Oil and Terminal—will suffer.” It forecasts APMM’s distributable net income “to be USD 260m in FY16 and USD 1.4bn in FY17 while factoring in the key risks, including impairment and dividend risks.”
Photo: Maersk Line
