EUR 1565.87 For Business Accounts Only

Container shipping equities

Weak macro environment
Container shipping is likely to be one of the sectors most affected by the novel coronavirus (COVID-19), with global
box trade set to be heavily impacted by disruption to the world economy, consumer activity and supply chains. The
International Monetary Fund’s (IMF) June update to its world economic outlook downgraded the global output decline
for 2020 to -4.9%, from -3% in April, followed by a 5.4% rebound in 2021. The IMF’s latest forecast assumes that the
pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery will be
more gradual than expected. As such, Drewry's latest Container forecaster update released on 30 June now expects
annual global volume decline (or demand) to shrink by 7.3% yoy this year.
Carriers, surprisingly, are set for a better 2020 than anticipated
Container shipping lines are one of the few sectors that can be said to be having a good pandemic. Perversely, despite a
sudden fall off in demand for their services, lines look set to make more money this year than they have in a long time as
their crisis-management tactics (essentially blanking voyages) has paid off handsomely. Based on the available financials
of selected carriers, Drewry estimates that the industry secured an operating profit (EBIT) of around USD 1.4bn and margin
of 3.2% in 1Q20, pretty much on par with the same quarter of last year. Nine out of the 11 carriers analysed were able to turn
an operating profit in the period. It has to be said that the first quarter was not a full test of the industry’s COVID-19 coping
mechanism as most countries did not enter lockdown until quite late in the period. As such, the real test was always going
to come in 2Q20. While we expect underlying trade volumes to be very weak in the second quarter, as demonstrated by the
ongoing sales drop-off for the three Taiwanese carriers, we have also seen an equivalent response on the supply and cost
sides by carriers, prompting significantly inflated freight rates. Such is the optimism that previously guarded companies are
now upgrading quarterly and full-year guidance. Maersk group, for example, now expects an EBITDA before restructuring and
integration costs for 2Q20 to be slightly above 1Q20 (USD 1.5bn). Similarly, Hapag Lloyd achieved a 20.3% year-on-year rise
in EBITDA to EUR 1.15bn (USD 1.31bn) and a 28.5% increase in EBIT to around EUR 500mn in the first six months of 2020.
Stretched balance sheets
Carrier fortunes have been subjected to a rollercoaster ride since mid-2018. When it seemed the trade war between the
US and China has subsided, a new threat in form of COVID-19 appeared, increasing pressure on financials and balance
sheets. We estimate that the 13 top container liners doubled their aggregate debt to USD 80bn in 2008-19; the average
year-end 2019 debt/equity ratio has risen to 126% from 70% at end of 2008. Carriers are now in survival mode and
doing everything in their power to protect cash flows. In a repeat move from 2009, some carriers are taking advantage
of lower fuel prices and rerouting services via the Cape of Good Hope to save on canal fees. Amid all this, the financial
hand of the state has been extended to see some carriers through the liquidity crises. The likes of Pacific International
Lines, CMA CGM, HMM, Evergreen and Yang Ming have all recently received some form of government assistance, and
state support is available for Hapag-Lloyd, although CEO Rolf Habben Jansen doesn’t believe his company will need it.
Our list of the three ‘strongest’ companies based on financial health includes Samudera, SITC and ONE, while the five
‘weakest’ ones are PIL, Yang Ming Marine, HMM, ZIM and CMA CGM.
Meanwhile, despite being in reasonably good financial health, Maersk group and OOIL (Cosco subsidiary) have been
placed in the Medium risk category as their Altman Z-score ranges between 1.81 and 2.99.