Drewry Maritime Financial Research (DMFR) remains optimistic about continued high stock prices and rising profitability in the container carrier sector.
In a recent analysis, DMFR analyses factors supporting its conclusion that equity investors should ‘stay put’ in the sector and that annual carrier industry profits will rise again in 2022.
In fact, 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.”
Asian liner operators were the top performers; with Yang Ming up by 1,583% (as of mid-December 2021), 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 performance is due 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.
Clearly, the pandemic and ensuing supply chain crisis that supercharged carrier profits has been the primary driver for the share price bonanza. This was reinforced when share prices bounced back in November after discovery of the Omicron variant, having previously been in retreat since July when there was greater hope for swifter market normalisation
Drewry stated.
In addition, given strong stock performances, and the assumption that spot sea freight rates have peaked, some investors may be tempted to exit the container shipping space. However, Drewry sees three key reasons to stay positive about the sector:
- The Omicron variant 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, it is presumed that the industry will report a free cash flow in excess of $100bn for full year 2021 after reporting $68bn in 9m21. This should ensure further share price appreciation as cash is paid to shareholders in the form of dividends and new investments are made;
- Returns on invested capital to be above the weighted average cost of capital (WACC) for a more sustained period. It is believed that the current congestion is an opportunity for shipping companies to obtain better (and longer) 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.
Considering 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
stated Drewry, noting that 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.
