Drewry Maritime Financial Research (DMFR) remains optimistic about continued high stock prices and rising profitability in the container carrier sector.
More specifically, DMFR supports that equity investors should ‘stay put’ in the sector and that annual carrier industry profits will rise again in 2022.
The strong performance in the global container shipping sector has generated very handsome spill-over benefits for stock investors. The returns since the start of 2020 have been astronomical
says Drewry.
Asian liner operators were the top performers, with Yang Ming up by 1,583%, followed by Evergreen Marine’s gain of 987% and Wan Hai’s 976%. HMM generated returns of 621%. More modest growth was seen in Europe, where Hapag-Lloyd shares increased by 192% and Maersk’s by 123%.
Part of this remarkable performance can be attributed to strengthening balance sheets as data from 12 carriers suggests cumulative debt has reduced by $3.5 billion between end-December 2020 and end-September 2021 to $73.2bn
according to Drewry.
What is more, the pandemic and the supply chain crisis that supercharged carrier profits has been the primary driver for the share price bonanza
Considering the strong stock performances and the assumption that spot sea freight rates have peaked, Drewry notes that some investors may be tempted to exit the container shipping space. However, there are three key reasons to stay positive about the sector:
- The new Covid variant, Omicron, has increased the risk of extended supply chain disruption, which could prop up spot rates for longer and assist contract negotiations;
- Strong free cash flow in the next two years should lift share prices. Maersk has estimated that the group is expecting FCF of about $14.5 billion by end of 2021. Based on that, Drewry assumes that the industry will report a free cash flow in excess of $100bn for full year 2021 after reporting $68bn in 9m21.
- Returns on invested capital to be above the weighted average cost of capital (WACC) for a more sustained period. The current congestion is an opportunity for shipping companies to obtain better contract terms from shippers, who will want to ensure their cargo can be moved and avoid high volatility in prices. This will mean sustained profits and higher returns on invested capital versus WACC.
Concluding, given the current scenario of supply chain logjams and rising threat of the Omicron virus, Drewry is upgrading its annual forecast for 2021 from its previous guidance of $150bn to $190bn, at a margin of approximately 43%.
The smoother earnings forecast rationale stems from a pivot away from the volatile spot market towards longer-term contracts that are expected to be signed at significantly higher levels in upcoming negotiations. This will ensure high profits for the global container shipping sector that will continue to generate very handsome spill-over benefits for stock investors through both soaring share prices and generous dividends
Drewry states.
