Maersk, trade mess but promises of blockchained TFEs

AP Möller Maersk is about maritime transportation and logistics. Its Ocean division, which combines container shipping and the strategic transshipment hubs, is by far the main contributor to group revenue (>70% of the total) and EBITDA (75% of the total before the unallocated activities).

The stock underperformed very slightly the transport sector (+6% vs +7% ytd). In H1 19, the group posted higher revenue (+1.6%) and improved significantly its EBITDA margin (+2.4pts to 13.5% of revenue) but has been trading in some sort of a DKK7,000-9,000 tunnel over the last 18 months. This is actually a  decent performance if one cares to remember how destructive Trump tweets have been for the global transport industry.

Bumpy

Trade disputes, so far so manageable

The US-China trade disputes, i.e. how many containers sail between China and the rest of the world, was not much of a bite by H1 19 as goods impacted by higher tariffs represented only 4% of the US consumer basket. In Q2 19, the Ocean division posted revenue growth (+2.8% vs +1.7% in Q1 19) thanks to higher volumes (+1.4% in Q2 19 vs -2.2% in Q1 19) and average freight rates (+1.5% in Q2 19 vs +3.9% in Q1 19). Management reiterated 2019 guidance of organic volume growth for this business in line with market growth (+1-3% expected). The high end of the range looks difficult to achieve allowing for the recent downward revision of international trade by the World Trade Organisation (+1.2% expected vs +2.6% previously).

Honourable unit cost performance

The Ocean division has performed well on the cost side so far in 2019. The unit cost at fixed bunker price decreased by 3.5% yoy in Q2 19 (vs -0.4% yoy in Q1 19) and by 1.6% yoy excluding currency effects. While the IMO requirement of 0.5% sulphur content fuel for marine transportation inflates bunker costs of container shipping companies, the Ocean division benefited from slightly lower bunker costs in H1 19 thanks to lower consumption of fuel (-10%) by the most recent vessels and a better utilisation of the vessels in the network which offset the 9% increase in the average bunker price. Further improvement is expected in H2 19 assuming that the top-line does not tank.

Committed to higher but uninspiring ROICs 

AP Möller-Maersk completed its exit from the Energy sector with the separation and listing of Maersk Drilling in early April 2019. Focused on container shipping, ports and logistics, the group’s financial targets include a balanced EBIT between the Ocean and non-Ocean divisions in 2023 implying investments of which acquisitions in Logistic & Services and a ROIC above 7.5% in the long term. It has come a long way considering the achievement in mid-2019. Based on EBITDA, the Ocean division represented 75% of the total before the unallocated activities in H1 19 (vs 70% of the total in H1 18). Regarding the ROIC, there was some progress in H1 19 (2.2%, of which 3.1% in Q2 19 and 1.3% in Q1 19) compared to the poor level in H1 18 (-0.2%).

ROCE: AP Möller-Maersk vs the transport sector

Shipping goes blockchain with TradeLens 

Developed by IBM and AP Möller-Maersk in 2016 and launched in 2018, TradeLens is an open blockchain-based supply chain for the whole container shipping industry providing a lot of advantages such as less time wasted, paperless trade and lower administrative costs, better utilisation of the fleet, low fraud, traceability and transparency.  TradeLens scored points recently when CMA CGM and MSC (partner of Group Maersk in the 2M alliance) joined the platform in July 2019 followed by Hapag Lloyd and ONE (grouping of the three Japanese companies ‘K’Line, MOL, NYK).

Actually, more than 100 organisations including the major container shipping companies except for the Chinese players, ports, terminal operators, logistics providers, freight forwarders, customs and government authorities are connected to the platform. TradeLens captures 1.5m shipping events per day and the business represents 48% of the volume of containers in the world. The financial impact is very limited at this stage for AP Möller-Maersk. The business model is undisclosed except that customers would pay a transactional fee of some $/FFE.

We see an analogy with a Global Distribution Systems (airline industry) based on fees and incentives to satisfy every player. Finally, there is no information on the potential savings which should be substantial.

In previous papers, we addressed the enormous potential of smart contracts applied to containers once a blockchained industry vertical is up and running. Obviously, how much is a shared utility will define the business model. Whatever, it is a good sign that Maersk has essentially embarked with it the whole shipping industry ex China. This shows where the value lies.

35% upside

The strong upside stems from a high DCF valuation (DKK11,576/share), an attractive SOTP (DKK10,800/share) and advantageous comparison-based valuations. In the short term, there is no catalyst in favour of AP Möller-Maersk. Trump and IMO regulations on low-sulphur fuel will manage to kill visibility on the group’s results for longer. Never mind, we believe that all of these concerns are largely baked in, assuming central banks continue to iron out Trump’s ability to create friction.

Transport sector at historical low levels