EUR 850.00 For Business Accounts Only

Morningstar | Maersk Pre-Releases 2Q, but Numbers Not Terrible

It's not often that shares rally on the back of an effective profit warning, but such is the case with no-moat Maersk on the afternoon of Aug. 7, 2018. Just over a week ahead of the scheduled first-half update, management guided to a lower EBITDA figure for the full year, based on higher bunker fuel prices and lower freight rates in the flagship Maersk Line business. With market expectations already low, however, today’s update has come as somewhat of a positive surprise. While we plan on making modest adjustments to our near-term forecasts on the back of this update, we do not expect a material change in our DKK 12,000 fair value estimate, and we believe the shares represent an attractive upside opportunity at these levels.

Although spot freight rates had declined in the second quarter, the exit rate on the quarter has restored to normal levels. We view this as a big positive, and it fits with our thesis of increased rationality in the sector following various merger and acquisition deals and the formation of large shipping alliances over the past few years. We believe that the near 30% year-over-year increase in bunker fuel prices was more the issue for Maersk. Maersk’s client contracts are roughly split such that 50% are spot and the other 50% are on terms of three months or longer, meaning that bunker fuel price movements can have a material lag effect on profitability within the business. As such, management has lowered the expected EBITDA range for full-year 2018 from $4 billion-$5 billion to $3.5 billion-$4.2 billion.

While any lowering of guidance is disappointing, in the longer term we believe the Maersk story is an attractive one. In the past two years, the company has become a focused transport business, has shored up its balance sheet significantly, and should be in a good position to return significant amounts of cash to shareholders over the next few years.