Weak Global Freight Rates Sink Maersk Shares

As reported by Bloomberg today, A.P. Moller-Maersk A/S, owner of the world’s largest container line, reported a 43 percent decline in third-quarter profit as the shipping industry continues to suffer from overcapacity.

Net income fell to $429 million last quarter compared with $755 million a year earlier, the Copenhagen-based company said on Wednesday.

That missed the average estimate of $501 million in a Bloomberg survey of 15 analysts.

The shares fell as much as 9 percent, the most in four months.

“The result is unsatisfactory, but driven by low prices,” Chief Executive Officer Soren Skou said in a statement.

“The Maersk Group delivered an underlying profit of USD 426m in the third quarter of 2016. The result is unsatisfactory, but driven by low prices. We generally perform strongly on cost and volume across businesses. Maersk Line for the second quarter in a row reported a loss due to continued low freight rates, down 16% y-o-y. Freight rates were however up 5.5% q-o-q, for the first time since Q3 2014. Maersk Line performed strongly on volume and unit cost. APM Terminals delivered a result below last year, as we continued to be challenged by low volume growth on a like - for-like basis. For the second quarter in a row Maersk Oil delivered a positive result driven by strong cost performance and production efficiency. Also Maersk Drilling delivered strong profits, driven by termination fees and good cost performance. The implementation of the new strategic direction and the restructuring of the Group is progressing, and we look forward to sharing further details at the Capital Markets Day on 13th of December,” says Maersk Group CEO Søren Skou.

Maersk said its underlying profit for 2016 will be “below” $1 billion. Previously, the company had said the full-year result would fall “significantly” short of 2015’s $3.1 billion.

The shares declined 8.9 percent to 9,220 kroner as of 10:17 a.m. in Copenhagen. That pared the stock’s gain this year to 2.7 percent.

Maersk’s position as the industry giant gives it some scope to ride out low freight rates as it builds up scale.

DNB Markets describes Maersk Line as the “Saudi Arabia of the container market,” with reported average rates lower than consensus expectations. “The combination of strong volume growth but still-low rates means we still believe Maersk Line will continue to use price to gain market share,” DNB said.

An excess of vessels and weak trade growth have driven container lines to try to under-bid each other on the rates they offer clients.

The climate has proven lethal for some industry members, with South Korea’s biggest line Hanjin Shipping Co. filing for bankruptcy protection in August.

Earlier this week, Japan’s three biggest container lines said they plan to merge their operations in an efforts to return to profit.

“We had hoped the Hanjin bankruptcy would give a boost to Maersk Line in the final quarter, mainly from higher volumes,” Frode Morkedal, an analyst at Clarksons Platou, said in note.

But the “weak full-year guidance points to limited positive impact from Hanjin.”

Maersk’s response to the challenges it faces has been to cut costs. On Wednesday it said expenditure at Maersk Line declined 14 percent in the quarter, but that was outpaced by a 16 percent drop in freight rates.

The shipping line reported a net operating loss after tax of $116 million compared with a profit by the same measure of $264 million a year earlier.

The company has also announced plans to split up its conglomerate enabling it to focus more on the container operations, for which it will seek acquisitions.

“The implementation of the new strategic direction and the restructuring of the group is progressing,” CEO Skou said.

Source: Bloomberg

Related Article: Japanese Lines Mergers All About Scale and Survival