Sunday, November 29, 2009

Maersk Leaks Cash But Still Floats

In spite of shipping-world chaos, AP Moller-Maersk stands out as a solid player.

AP Moller-Maersk ( AMKAF - news -people ) reported a wider than expected, nine-month loss of 3.9 billion kronor ($783 million) on Thursday and disappointed the marketby not upping its guidance. The company's chief executive, Nils Smedegaard, complained of the drop in cargo rates, which are set at semiannual negotiations with clients and through the spot market, as Maersk's biggest problem at the moment.

The average rate for large container ships in the industry has dropped from $38,500 a day in 2005, to just $5,750 in July of this year. (See "The Shipping News Is Ugly.")

Jyske Bank analyst Christian Nagstrup believes that while shipping rates have seen the worst, they probably won't return to their precrisis levels before 2014. Maersk's own daily rates have fallen by 30% year-on-year in the last nine months.

Falling rates come amid sliding volumes, and the resulting oversupply in the shipping industry that went from boom to bust because of the global credit crisis. Today some 10% of the industry's global fleet have been laid up inactive, anchored off the coast of large ports like Singapore.

Only around 3% of Maersk ships have been taken out of service, helped by the company's scrapping of many of its vessels. Maersk also benefits from a relatively strong balance sheet and its makeup as a conglomerate with a large oil and gas business that brings in comparatively stable earnings.

Last September Maersk was even able to announce it was tapping investors for close to $1.8 billion through a share placement, to take advantage of possible acquisitions and to boost its financial flexibility. (See "Maersk Sees 'Long Recovery.'")

Aviate Global broker Dan Waterman believes Maersk is undervalued, and he sees the stock as a play on improving global trade flows that have already started to show some improvement. He points to strong October volumes at rival Neptune Orient Lines ( NPTOY - news -people ) and cargo through Shanghai Port as examples.

Maersk does expect some improvement in rates in the fourth quarter, but management has little incentive to sound positive just yet--raising the company's outlook won't necessarily help with rate negotiations. Fortunately, shipping companies are now in a better position to push for higher rates since spot rates are no longer below contract rates.

The market is currently edgy about the fortunes of the shipping industry, particularly after the bankruptcy of the medium-size American carrier Eastwind Maritime earlier this year. Eastwind had been unable to pay $300 million in debt to its lenders, and its collapse has sent tremors through the European banking sector, which currently holds more than $350 billion in shipping industry loans, according to the New York Times.

Maersk's move to raise funds through a bond issue in September rather than through bank financing, which is still eye-wateringly expensive for shipping firms, is probably another sign of its resilience.

Source: Forbes

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