Alphaliner: Shipping Lines Expect Freight Stabilization to Slowdown Stock Decline

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Shipping line operators expect the share price to slow down if freight rates stabilize.

Listed shipping companies see an opportunity to “stop the rot” in share prices as the decline in the Shanghai Container Freight Index (SCFI) slows.

Carrier share Price Performance (Indexed at 100 on 31/12/21 Source: Alphaliner
Carrier share Price Performance (Indexed at 100 on 31/12/21 Source: Alphaliner

The top eight container shipping stocks have lost an average of 45% of their value since the start of the year following the spike in the SCFI on January 7.

It marked a turning point for larger carriers like Maersk and COSCO, whose share prices had previously held up in 2021 thanks to strong contract business and less exposure to trans-Pacific trade. At the end of October, the share prices of the three airlines were down 37% and 45% for the year.

Carriers heavily exposed to the spot and transpacific market, such as HMM, Evergreen Marine, Yang Ming and Wan Hai, saw their shares fall much earlier, in mid-2021. Shares of the three lines have fallen an average of 49% since the end of 2021. Jan 1 and are even farther from their peaks than the larger carriers, 50% to 65% below 52-week highs.

However, signs that the collapse in the SCFI is slowing have been accompanied by smaller declines in equity prices. The SCFI index plunged -9% on average each week in September. In October, this was reduced to an average weekly drop of -3%.

Shaghai Container Freight Index since 31/12/21 Source: Alphaliner & SSE
Shaghai Container Freight Index since 31/12/21 Source: Alphaliner & SSE

 

A future stagnation in freight rates could open up buying opportunities for investors given the huge amount of cash still generated by major carriers. Maersk, which is due to release its third-quarter results on Wednesday, expects free cash flow to top US$24 billion in 2022.

Meanwhile, Hapag-Lloyd reported free cash flow of €8.6bn for the first half of 2022, while it expects operating profit to reach 75%-100% of this period in the second half of the year.

Such cash flows are expected to create value for shareholders, either in the form of additional income-generating investments or share buybacks or dividends.
Potential investment opportunities are highlighted in analyst recommendations.

Although the number of sell ratings on Maersk Group shares has increased slightly over the last three months, the Group currently has 9 buy recommendations and 6 hold ratings. Hapag-Lloyd, a notoriously volatile stock due to its closed ownership structure, currently maintains an even number of hold and buy recommendations.

A strong set of third-quarter earnings will boost participation
Outlook So far, no carrier has lowered previous full-year estimates for 2022 despite the sharp drop in freight rates, though there are clear signs that the third quarter will be smoother for many than the previous quarter.

COSCO Shipping last week reported a 12% drop in net profit in the third quarter compared to the previous quarter. Meanwhile, US-listed Matson, which expanded considerably into transpacific services during the pandemic, reported a 33% drop in shipping operating income compared to the second quarter, as well as a 14% decline in ocean freight. % year after year.

More recently, ONE this week reported record revenue and net profit for the third quarter of the year (Japanese fiscal second quarter), but warned of sharply lower profits in the next six months (see page 4). Regardless, annual profit remains on track to hit $15 billion. Eager to invest some of its profits, ONE is also part of the consortium that will acquire the Atlas Corporation and thus the Seaspan shipowner.

Source: Alphaliner, SSE

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