AP Moller Maersk- Buy: Not done yet; 4Q could surprise on the upside
Solid 2Q21 results … On 2 August, Maersk reported revenue of USD14.2bn, with underlying EBITDA of USD5.1bn (up 26% q-o-q) and underlying EBIT of USD4.1bn (up 33% q-o-q). In 2Q, containers volumes handled grew 15% y-o-y while average freight rates jumped 59% y-o-y and 14% q-o-q. We have been arguing for sequential improvement given how strong freight rates have been (It ain’t over yet, 26 July 2021). The company is set to publish full 2Q earnings on 6 August 2021.
… and improved, but still conservative, FY21e guidance: Maersk lifted its full-year earnings outlook for the second time this year as it echoed our view that the exceptional market situation could continue at least through year-end. It raised its full-year demand growth forecasts to 6-8% (from 5-7%), driven mainly by exports from China to the US. It expects its 3Q21 results to exceed 2Q21 levels – not surprising given the profit guidance issued by a number of its peers in the past few weeks (Positive read-across from Hapag Lloyd’s guidance, 31 July). Maersk lifted its FY21e EBITDA guidance range to USD18-19.5bn (up 30-38% from USD13-15bn) and its EBIT guidance range to USD14-15.5bn (up 41-56% from USD9-11bn).
Not done yet. We still see room for one more earnings upgrade to 2021e earnings as visibility on 4Q improves. Maersk’s revised 4Q guidance implies EBIT of USD2.6bn, roughly half the EBIT of 3Q21. Evergreen (2603 TT, Hold, TWD132) in its recently concluded AGM opined that 4Q could be as strong as 3Q if port congestion persists. Among the major industry players, K+N (KNIN SW, Hold, CHF305.60) in its recent results release talked about strength in freight rates continuing until February 2022. Any further delay in easing of congestion would strengthen the case for better-than-consensus 2022e numbers, as most of the contracts are done at the start of the year.
Earnings change: Following this guidance upgrade, we are raising our 2021e EBIT estimates by 24%, to USD15.6bn, above the company’s guidance range. Our revised estimates imply 4Q EBIT that is as strong as 2Q. We are now 24% above consensus on 2021e EBIT and confident we will see a major consensus earnings upgrade over the next week. We raise our 2021e dividend pay-out to 60% (from 40%).
Re-rating under way – reiterate Buy with higher TP of DKK24,000 (previously DKK23,000): While we expect Maersk’s 2023e EBITDA to decline 26% vs 2021e, the quality of earnings should improve significantly, with logistics and terminal businesses 6-8% higher, which often trade at c10x EV/EBITDA, while Ocean segment EBITDA should decline by 49%, which often trades at 4-5x EBITDA. Given the robust operating cash flows, we expect a 41% capital return to shareholders based solely dividends and buybacks over the next three years (20% payable in just the next year).
Source: HSBC Global Research