Impact of Russia-Ukraine crisis on container and port equities
Impact on container shipping stocks
The Russia-Ukraine conflict has sent ripples through financial markets world over, but the impact on container shipping stocks thus far has been negligible. While it is still early to assess the overall impact in the long run, two things are certain – increasing risks and uncertainty in the medium-to-long term, and strong cash flows for liner operators in 2022.
Russia-Ukraine conflict – (little) impact on container shipping
MSCI world index had plunged by more than 13% YTD as of 8 March 2022. In comparison, the Drewry Container shipping equity index had lost a little less than 6%.
A closer look at the performance of our index reveals that the two European carriers – Hapag Lloyd (HLAG) and AP Moller Maersk (APMM) – which make up about 41% of our market cap-weighted container shipping equity index lost on average 13.5% YTD, thereby pushing the index down. The majority of losses for the two carriers occurred before 24 February 2022 (APMM: -9%, HLAG: -14%) and are attributed to company-specific factors and result reports rather than the threat of the Russia-Ukraine conflict or the conflict itself. After the invasion, APMM and HLAG lost just -3% and -2%, respectively.
Of the 12 stocks that make up our index, nine stocks gained in the two-week period, with Samudera emerging a winner, after gaining 30% in the said period. This again is attributed to company-specific factors as Samudera announced record FY21 results on 24 February, the day as the invasion began. The results were record-breaking with a manifold increase in its bottom line, from USD 7.2mn in FY20 to USD 128.6mn in FY21. As a result, the stock gained 25% on the same trading day (24 February 2022) and has gained only 3.4% since. Other container stocks under our coverage also followed a similar trend, wherein the threat of invasion had little to zero impact and company- specific factors dominated the movement of the stock price.
Short-term impact – why stock prices remained unaffected
Like any commodity, the price of the stock depends on supply and demand. At a time when markets around the world are turning red, container shipping stocks are declaring record dividends. Samudera, for example, announced a special per share dividend of SGD 0.1275 for FY21, much higher than the SGD 0.003 for FY20. APMM on 9 February 2022 announced a dividend per share of DKK 2,500 for FY21 phenomenally higher than DKK 330 in FY20. A similar story is expected from most container stocks. Also, while the number of negatives in the sector are increasing – rising inflation, crude oil prices, easing demand, among others – most companies are expected to deliver solid results for FY22 as well. This is because:
Supply chain bottlenecks including port congestion still linger
Most operators have entered into long-term charter contracts at high freight rates
Larger-than-usual percentage of the fleet is expected to head for maintenance as operators delayed the scheduled maintenance in FY21 to make the most of the bull market
These factors together will ensure strong cash flows for operators for the most part of 2022.
Medium-to-long term impact on the sector
The longer the conflict between the two countries, the larger would be the impact felt by the global economy. Even in an event of an early resolution, the sanctions placed would drive inflation, and diminish consumer demand and discretionary spending. In such a scenario, overall imports will take a pounding, which could give the port operators the breathing space to ease port congestion, and thereby contribute towards the easing of bottlenecks that are currently plaguing the supply chain industry. All in all, a lot remains uncertain – the duration of the war, the expanse of the sanctions, the impact on global economy and inflation, and the subsequent toll on consumer demand.
The only certainty is that the ongoing conflict has substantially increased the uncertainty in the global container shipping market in the medium-to-long term. As a result, we maintain our Neutral outlook on most of the stocks, as there is a limited upside and a limited downside, at least for 2022.
Impact on port and terminals’ stock performances
The invasion of Ukraine by Russia is a Black Swan event, having a material impact on the global equities. However, the current situation is not a shipping crisis. The same can be witnessed from the performance of the Drewry port index (excluding GLPR and HHLA), which posted a positive gain of 3.3% on a YTD basis but declined merely by 1.4% since 23 February 2022 (the day before the invasion).
However, the ongoing war dented the stock prices of companies exposed to Russia and Ukraine and GLPR was no different. It is one of the two companies (the other being HHLA) covered by the Drewry equity research division, having assets/operations directly exposed to the Russia-Ukraine crisis. GLPR has Global Depository Receipts (GDR) listed on the London Stock Exchange (one GDR representing 3 ordinary shares) since mid-2011. The stock price of GLPR crashed by 74.2% since 23 February 2022 and yielded a negative return of 82.9% on a YTD basis, while HHLA’s (listed on Frankfurt Stock Exchange – Germany) stock price declined by 15% and 25.4% since 23 February 2022 and on YTD basis, respectively.
Being at the center of the conflict, Black Sea shipping volumes are likely to be the worst hit. Moreover, the sanctions will also hamper the container traffic in the Baltic Basin. Elsewhere, the Far East ports will benefit marginally from this situation as cargoes will be diverted, but the economic impact of sanctions / plummeting value of rouble will significantly hit imports.
GLPR’s operations have limited exposure to crises zone
A detailed analysis of GLPR’s operating footprint clarifies that the company does not have any direct exposure to the conflict zone of the Black Sea. The company operates only in the Baltics and the Far East regions of Russia. In the Baltics, it operates four container terminals – First Container Terminal (FCT), Petrolesport (PLP), and Moby Dik (MD) in St. Petersburg and Ust-Luga Container Terminal (ULCT) in Ust- Luga Port Cluster. The Baltic is the gateway for 46% of the total Russian container throughput. These terminals provide direct access to the most populous and economically developed regions of the European part of Russia, including Moscow and St. Petersburg. GLPR also owns an inland container terminal, Yanino Logistics Park (YLP), located in St. Petersburg, and has shareholdings in two container terminals in Finland (MLT Kotka and MLT Helsinki). In the Far East Basin, which handled 35% of Russia’s 2021 total container traffic, GLPR operates Vostochnaya Stevedoring Company (VSC).
GLPR posts strong 2021 results
Recently, the company reported its 2021 financial results. Its revenue increased by 30.8% to USD 502.8mn on the back of a 2.8% rise in the consolidated revenue to 1.6mteu. Consequently, adjusted EBITDA expanded by 17.4% to USD 246.2mn. The company ended the year with a robust balance sheet with a cash balance of USD 296.7mn. GLPR continues to reduce its net debt. As of 2021 year-end, net debt stood USD 491.3mn (vs 2020: USD 612.1mn and 2016: USD 1000.3mn). Net debt/EBITDA reduced to 2.0x (vs 2020: 2.9x and 2016: 4.5x). In the recent past, it has prioritised deleveraging over dividend distribution and continued to do the same in 2021. During 2020 and 2021, GLPR did not declare or pay any dividends.
The company maintains a strong liquidity profile, with a total cash balance and operating cash flow of USD 523mn. Both collectively are enough to meet the company’s immediate obligations (USD 211.8mn in 2022). However, in 2023 another USD 302.5mn will be falling due. Collectively, a major chunk of debt (68.7%) will become due in the next two years (2022-24). Given the current sanctions, refinancing this debt will come at a significantly higher cost. Especially, if the sanctions are long-lasting – which is expected to have a significantly adverse impact on its top line and thereby limiting the company’s ability to repay/refinance debt.
Currency-wise, GLPR’s 67.8% of debt is USD denominated, highlighting the heightened currency risk in the wake of the plummeting Russian Rouble.
Even though in its recent filings, GLPR stated that its consolidated marine container throughput increased by 20% YoY in the first two months of 2022, the trend will be completely offset in March as various liners, including Maersk have suspended all new bookings to and from Russia.
GLPR from a valuation perspective
From the financial perspective, the company fared well (until end 2021) with a rising topline and improving EBITDA margins. Furthermore, GLPR’s liquidity and leverage profile has improved historically. Despite these positives, the stock price plunged as heightened war-related uncertainties saw equity investors opt to move their investment to more stable/safe options. Additionally, with the company operating in Russia, it has also come in within the purview of the global sanctions imposed on the country. As a result, LSE on 3 March 2022 suspended the share trading of GLPR until further notice.
As the trading in the stock is no longer available, assessing the situation from a valuation perspective is futile. However, based on the last traded price, the recent drop in share price had significantly lowered GLPR’s EV/EBITDA, bringing stock at a deep discount from the historical perspective and from its peer valuation. Going forward, extended sanctions with a likely devastating impact on Russian trade volumes will put the commercial viability of the business at risk.
HHLA confirms the limited impact of war on its operations
Hamburger Hafen und Logistik AG (HHLA) operates in the Port of Odessa – the largest container terminal in Ukraine. The ongoing crisis is expected to have a limited impact on the company’s operating metrics, as the port of Odessa’s container throughput, revenue and earnings contribute low to mid-single-digit percentages to the HHLA’s respective financials. Also, the company has confirmed that a significant part of the investments made to date, amounting to EUR 170mn, had already been amortised by the end of the 2020 financial year.
Additionally, because of the sanctions imposed by the European Union, HHLA has stopped handing containers coming from or destined to Russia in its container terminals in Hamburg. This will also have a limited impact on its financials as Russia’s contribution to HHLA’s gross throughput is limited to low-single-digit (3% in 2020).