Maersk Earnings: Some Positive Signs as the Company Battles the Storm

Volumes retreated across the board for Maersk MAERSK B as the anticipated correction arrived in the first quarter. A decline in freight rates as global supply chain blockages are finally relieved, combined with a fall in volumes, driven by lower consumer demand and business spending, drove revenue down by more than a quarter year over year. Guidance for the full year is pointing to volume growth in the ocean business being flat at best, leading to EBITDA of $9.5 billion at the midpoint, roughly a quarter of what the company did last year. However, we see attractive upside to our DKK 20,000 fair value estimate from here.

Maersk’s ocean business had some element of protection from falling rates, in that many clients were still locked into higher-rate contracts. However, as these contracts roll off, realised rates are converging to spot rates and this means there is further pain to come over the next couple of quarters. However, the good news is that the trend toward contracts rather than spot shipments remains from the coronavirus pandemic, with Maersk expecting 70% of volumes to originate from contracts. This is good news for the industry as it provides longer-term visibility on revenue. Maersk did a decent job on cost controls in the first quarter, but this should be a key area of focus over the next few quarters if the company wishes to stop margin erosion.

Even with the doom and gloom surrounding sea freight, we are confident the next few years won’t be as bad as investors fear for two reasons. First, the industry is far more rational than it has been in the past. Second, the company is in good shape after it paid down debt significantly during the good years to the point that even with trough EBITDA guidance for 2023 its net debt/EBITDA ratio is still likely to remain at just 1 times.