A.P. Moller-Maersk A/S

Transcription

1 CREDIT OPINION A.P. Moller-Maersk A/S Update following downgrade to 3 Update Summary RATINGS A.P. Moller-Maersk A/S Domicile Denmark Long Term Rating 3 Type LT Issuer Rating - Dom Curr Outlook Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Contacts Maria Maslovsky VP-Senior Analyst maria.maslovsky@moodys.com Joao De Almeida Associate Analyst joao.dealmeidamarques@moodys.com Anke Rindermann Associate Managing Director anke.rindermann@moodys.com The main drivers of Maersk's 3 rating are: (1) its leadership in the global container shipping sector and its solid market position in Ocean and Terminals along with strategic links with smaller Logistics and Manufacturing businesses; (2) good progress in integrating Hamburg Sud with synergies expected to exceed initial estimates; (3) positive evolution of the separation of the energy businesses with Maersk Oil and Maersk Tankers completed and Maersk Drilling to be separated in H1 2019; (4) stable shareholding and disciplined management albeit some recent shareholder-friendly actions; (5) commitment to investment grade ratings; and (6) expected leverage (gross debt/ebitda) commensurate with 3 rating. However, Maersk's rating is constrained by: (1) uncertainty with respect to the utilization of the Total S.A. (3 stable) shares; (2) increased exposure to cyclical activities resulting from reduced business diversification following the planned separation of the energy businesses; (3) weakness in container shipping and potential negative effect of US/China trade tensions. On 7 December 2018, we downgraded Maersk s rating to 3 from 2 reflecting the company s somewhat elevated leverage and the risks embedded in the cyclical container shipping industry including the potential trade war and the need to pass through increased fuel prices as a result of low sulphur fuel regulation (IMO 2020). Exhibit 1 Maersk's leverage has been elevated Debt/EBITDA RCF/Net Debt 6.0x 60.0% 5.0x 4.0x 53.9% 50.0% 52.2% Asia Pacific % 33.1% 25.1% 20.0% 25.1% 1.8x 1.8x % 2.0x Americas 3.0x - 3.5x 3.0x CLIENT SERVICES 4.9x 47.3% 20%-30% 1.5x 1.0x 10.0% 0.0% Japan EMEA Source: Moody's Investors Service LTM Q m Forward View PF

2 Credit strengths» Leadership in the global container shipping sector and solid market position in Ocean and Terminals along with strategic links with smaller Logistics and Manufacturing businesses» Good progress in integrating Hamburg Sud with synergies expected to exceed initial estimates» Positive evolution of the separation of the energy businesses with Maersk Oil and Maersk Tankers completed and Maersk Drilling to be separated in H1 2019» Stable shareholding and disciplined management albeit some recent shareholder-friendly actions; public commitment to investment grade» Strong liquidity Credit challenges» Uncertainty with respect to the utilization of the Total S.A. shares» Weakness in container shipping and potential negative effect of US/China trade tensions» Increased exposure to cyclical activities resulting from reduced business diversification following the planned separation of the transportation and the energy businesses Rating outlook The stable rating outlook reflects Moody s expectation that Maersk will successfully complete the demerger of Maersk Drilling and apply the proceeds from that business financing to deleveraging. Moody s also expects that Maersk will prudently balance the use of the proceeds of Total S.A. shares between strengthening its balance sheet and providing a return to shareholders. The stable outlook further anticipates that the company will be able to generate positive free cash flow on a consistent basis. Factors that could lead to an upgrade» Gross debt/ebitda below 3.0x at all points in the cycle pro-forma for the sale of the energy businesses» Achievement of greater profitability as measured by consistently positive EBIT margin Factors that could lead to a downgrade» Gross debt/ebitda consistently exceeding 3.5x at any points in the cycle» Sustained negative free cash flow (after capex and dividends) This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Key indicators Exhibit 2 A.P. Moller-Maersk A/S US Millions Revenue Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 LTM (Sep-18) 12-18m Forward View , , , , , ,277.0 Size of fleet (number of ships) EBIT Margin (3 Year Avg) 14.8% 15.4% 14.1% 10.7% 6.0% 2.5% 1% - 4% 3.5% 4.0% 3.9% 2.4% 0.7% -0.8% 0% - 1% 1.8x 1.6x 1.7x 2.1x 3.3x 4.5x 3.0x - 3.5x 47.3% 50.2% 50.8% 46.1% 35.2% 28.4% 20% - 30% 12.0x 12.9x 13.5x 12.9x 10.6x 9.1x 4.0x - 5.5x ROA (NPATBUI / Total Assets) (3 year Avg) Debt / EBITDA (3 Year Avg) RCF / Net Debt (3 Year Avg) (FFO + Interest) / Interest Expense (3 Year Avg) All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-financial Corporations Source: Moody's Financial Metrics Corporate profile Headquartered in Copenhagen, Denmark, A.P. Møller-Mærsk A/S is an integrated container logistics company whose main business areas encompass container shipping, port terminals and logistics. The group also has legacy drilling and supply businesses that are expected to be separated. In 2017, Maersk reported revenues of $30.1 billion and EBITDA of $3.5 billion. In 1904 the Møller family founded the group, which has now become one of the largest Danish companies listed on the Nasdaq-OMX Copenhagen, with a current market capitalisation of around $28 billion. Most of the company shares (41.5% of the share capital and 51.2% of voting rights) are owned by A.P. Møller Holding A/S, a subsidiary established by the foundation which is known as A.P. Møller og Hustru Chastine Mc-Kinney Møllers Fond til almene Formaal (the Foundation), which together with the family foundation, the A.P. Møller og Hustru Chastine Mc-Kinney Møllers Familiefond, own 50.4% of the group's share capital and 64.3% of the voting rights. Detailed credit considerations Leadership in the global container shipping sector and solid market position in Ocean and Terminals along with strategic links with smaller Logistics and Manufacturing businesses Maersk Line, the largest segment of the Ocean business (79% of third quarter of 2018 EBITDA before eliminations), possesses the world's largest fleet capacity (approximately 17.8% market share including Hamburg Sud, according to Alphaliner), followed by Mediterranean Shipping Company (MSC, unrated, 14.6%), COSCO (including OOCL, unrated, 12.2%), CMA CGM (B1 negative, 11.9%) and Hapag-Lloyd (B2 stable, 7.2%). Maersk Line's fleet consisted of 353 owned and 370 chartered ships at 30 September 2018 with an average size of 5,538 TEUs. The company had further six new vessels comprising 1.8% of its current fleet on order to be delivered in 2019 and no further plans for new orders. Maersk is a top four terminal operator globally. Its Terminals & Towage business contributed 16% of EBITDA (before eliminations) in the third quarter of We view the terminals business as less cyclical in comparison to the liner since its major driver is freight volume, independent of the freight rate. The terminal business is also more profitable generating EBIT margins in the teens as compared to single digit margins for the liner. This is a differentiating factor in comparison to some of the other container shipping companies that we rate, and adds some diversification and vertical integration, although the terminal business is to some extent exposed to similar cycles. Logistics & Services business contributed approximately 4% of EBITDA in the third quarter of 2018 while Manufacturing was EBITDAneutral. However, Logistics & Services is a key participant in Maersk s integration of its transportation and logistics business lines, as well as in improving its customer value proposition. Through technological and digital initiatives such as TraceLens, a blockchain based global supply chain, and Twill, a one-stop-shop for container shipping from select Asian to European and US destinations, Maersk aims to differentiate its offering, make it more transparent to customers and suited to their unique needs. The successful execution on these initiatives is key to the strategy of the overall group and will be important to achieving expected integration synergies of up to $600 million. 3

4 Good progress in integrating Hamburg Sud with synergies expected to exceed initial estimates On 30 November 2017 Maersk closed its acquisition of Hamburg Sud, a complementary container liner. Hamburg Sud was the ninth largest container shipping company in the world with 103 vessels, according to Alphaliner, which represented circa 16% of Maersk's fleet. The integration of Hamburg Sud business is proceeding well and Maersk increased its target synergies from the transaction to minimum $500 million in 2019 from $ million originally. The increased pace of synergy realization reflects primarily earlier than expected execution on procurement economies of scale and fewer than anticipated customer losses. Positive evolution of the separation of the energy businesses with Maersk Oil and Maersk Tankers completed and Maersk Drilling to be separated in H On 21 August 2017, Maersk announced that it agreed to dispose of its Maersk Oil division to Total S.A. for an enterprise value of $7.45 billion. Maersk received $2.5 billion in cash, which was slated for debt repayment, and 97.5m shares representing 3.76% of Total S.A. share capital ( Total S.A. shares ) of which approximately $1.7 billion have been monetized through the third quarter of 2018 for debt repayment and general corporate purposes. The divestment was in line with Maersk's previously announced strategy of separating its energy assets from the Transport and Logistics business. On 17 August 2018, Maersk announced that Maersk Drilling will be demerged via a separate listing with the shares to be distributed to A.P. Moller-Maersk shareholders. In connection with the listing, A.P. Moller-Maersk will receive approximately $1.2 billion in proceeds of a new $1.5 billion financing at Maersk Drilling. Container shipping navigated through a difficult year in 2018, but new challenges await in 2019 Container shipping industry was challenged by oversupply and rapidly rising fuel costs in the first half of As those threats began to abate, the potential for a US/China trade war emerged, although somewhat lessened recently. These trends were reflected in anaemic freight rate growth shown on Exhibit 3. Exhibit 3 Container freight rates are recovering but still below historical levels China Containerized Freight Index (CCFI) 1,200 1,100 1, Source: FactSet Still, the global economic environment is anticipated to be less benign in 2019 than in 2018 with the global GDP projected to grow by 2.9% as compared to 3.3% in both 2017 and Similarly, global trade growth, the key demand proxy for container shipping, is anticipated to grow by approximately 3.1% in 2019, a reduction from 3.5% estimated for 2018 (Exhibit 4). 4

5 Exhibit 4 Global trade volume and industrial production levels are slowing amid rising trade tensions US Series3 World Advanced Economies Emerging/Developing Economies China EU 28 (RHS) 20% 65 World Trade Volume Advanced Economies Emerging/Developing Economies 55 5% 0% 50-5% 45-10% % -20% % 6% 4% Trade Volume Year over year % change 10% Volume of Export Order Books New Export Order Index [50+ = Econmic Expansion] 60 Industrial Production ex. Construction YoY % change, 3-mo moving avg. 5% 15% 3% 2% 1% 5% 4% 3% 2% 1% 0% 0% % Source: Haver Analytics, CBP Netherlands While the near-term economic outlook may be less supportive, the supply pipeline for 2019 is the most favourable in recent years with 2019 orderbook at 4.7% of total fleet and no ability to order more ships on such short notice. Exhibit 5 Moody's expectations for supply demand balance in the shipping sectors Dry Bulk (DWT) Containers (TEU) Tankers (DWT) , Supply growth in 2018 (million DWT, thousand TEU) About 10 About 900 About 20 Expected supply growth About 1% About 4% About 4% Expected demand growth About 2% About 3.5% About 1% -1% 0.5% 3% Stable Stable Negative Fleet as of 31 December 2017 (million DWT, thousand TEU) Supply growth vs. demand growth Segment views Deadweight tonnage (DWT) is a measure of a ship s volume, including bunker oil, fresh water and ballast water tanks, and crew and provision stores. Twenty-foot equivalent unit (TEU) is the standard measure of a container ship s capacity. * Newbuildings less postponements, cancellations and scrapping. Source: Drewry Maritime Research and Moody s Investors Service estimates Still, the industry is facing an upcoming challenge of adapting to low sulphur regulation that will become effective in January 2020 (IMO 2020) and will require all ocean-going vessels to utilize fuel with lower sulphur content. Such fuel is currently more expensive, and its costs (or the costs of otherwise adapting the ships) will need to be passed through to the end customers which is likely to take time and create a lag that could negatively impact earnings. Stable shareholding and disciplined management albeit some recent shareholder-friendly actions; public commitment to investment grade Maersk is indirectly owned (through A.P. Møller Holding A/S) by the Foundation headed by the founder's family. The Foundation is historically attached to the stability and long-term security of Maersk's operations. In addition, Maersk benefits from management's good track record, which has adjusted the group's leverage and corporate development to changes in the economic environment. Maersk has made share repurchases through the launch of a first $1 billion share buyback programme in September 2014, then renewed for another $1 billion in September When Maersk divested its stake in Danske Bank in 2015, it returned the cash proceeds to shareholders via a special dividend. We have considered both actions as credit negative; also, they took place when the operating environment of some of the group's business units had started to weaken. Going forward, Maersk noted that if needed it will adjust its dividend policy to deliver on its commitment to maintain investment grade credit profile. Indeed, in February 2017, Maersk 5

6 cut its dividend by 50%. Further, the company has stated on multiple occasions that any dividends to the shareholders as a result of the sale of the Total S.A. shares will be subject to maintaining its investment grade rating. Uncertainty with respect to the utilization of the Total S.A. shares and the separation of the remaining energy businesses Maersk is close to completing its separation strategy outlined in September With Maersk Tankers and Maersk Oil sold, and Maersk Drilling expected to be listed in 2019, the company is expected to generate $4.5 billion in cash proceeds ($1.2 billion from Maersk Tankers, $2.2 billion from Maersk Oil, $1.2 billion from Maersk Drilling). In addition, Maersk received 97.5 million of Total S.A. shares of which shares totalling $1.7 billion were monetized in 2018 and the remainder is valued at approximately $3.0-$4.0 billion. These significant liquid resources give Maersk material deleveraging potential which we anticipate the company to utilize to bring its leverage closer to our guidance of not exceeding 3.5x on a gross debt/ebitda basis. Exhibit 6 Debt/EBITDA (FFO + Interest) / Interest Expense 6.0x 16.0x 14.0x 15.0x 5.0x 14.1x 4.0x 4.9x 12.0x 12.0x 10.0x 3.0x - 3.5x 9.8x 3.0x 8.0x 9.2x 8.0x 6.0x 2.0x 4.0x 1.8x 1.8x 1.5x 1.0x x - 5.5x LTM Q x 12-18m Forward View PF Source: Moody's Investors Service Increased exposure to cyclical activities Maersk s businesses have material exposure to cyclical industries, in particular container shipping, in which operating margins can swing significantly year-on-year. Ocean segment reported an EBITDA of $2,080 million for the nine months ending 30 September 2018 (9.9% EBITDA margin) as compared to $2,160 million for a similar period in 2017 (13.5% EBITDA margin). Historically, Maersk mitigated its cyclical exposures with some profitable activities which have displayed a more stable operating performance over the past years, and currently the group's port terminals demonstrate more consistent profitability. Still, the performance of Maersk's port terminals, in addition to being somewhat correlated with that of the liner, has been weaker in recent years due to its exposure to oil exporting countries. Exhibit 7 Ocean's EBITDA margin has been lower and more volatile compared to the port business Company reported EBITDA margin Ocean Terminals & Towage 25.0% 21.5% 20.1% 20.0% 16.9% 18.2% 21.0% 20.5% 18.0% 15.0% 15.8% 14.4% 12.6% 10.0% 10.3% 9.8% 7.2% 5.0% 0.0% Q % Q Q Q Q Q Q Source: Company's reports 6

7 Maersk Line benefits from high geographic diversification, which helps to mitigate to some extent the high volatility of the freight rates. Along with its strong presence in the high-volume routes such as Asia-Europe and Asia-North America, Maersk has a substantial presence in niche markets such as the Latin America, Oceania, intra-asia and Africa. With the addition of Hamburg Sud, Maersk extended its network and increased its geographic diversity, providing its customers with a broader offer which should also help cushion the inherent industry volatility. Maersk also anticipates that as it integrates its liner, terminals and logistics offerings, effectively vertically integrating the ocean transportation industry, its earnings volatility will also be reduced. Liquidity analysis Maersk's liquidity is excellent with a $11.8 billion liquidity reserve at 30 September 2018 including $3.3 billion of unrestricted cash, securities and undrawn committed facilities over 12 months, in addition to $400 million of committed undrawn investment-specific financing in place. The company s capex commitments in 2019 are around $2.0-$2.5 billion. Maersk has approximately $3 billion of debt maturities in 2019 which are expected to be refinanced in due course. Maersk reduced its dividend in February Structural considerations We expect Maersk to continue pursuing primarily an unsecured financing strategy which has allowed the company to maintain its secured debt at $2.0 billion at year-end 2017 (11% of total debt). Also at year-end 2017, Maersk reported that over 90% of its assets were unencumbered. For this reason, we have also not notched down the issuer rating despite the presence of debt at the subsidiary level leading to a degree of structural subordination for the parent company debt. Still, we expect Maersk to continue utilizing secured debt and financial leases for those asset classes (ports, ships) where the terms are more favourable for the company. Rating methodology and scorecard factors We have utilized our Shipping Industry Methodology published in December 2017 to assess Maersk's credit profile. Exhibit 8 Rating Factors Current LTM 9/30/2018 Global Shipping Industry Grid [1][2] Factor 1 : Scale (20%) Moody's Month Forward View As of 12/7/2018 [3] Measure Score Measure Score a) Revenues (USD Billion) $37.3 a $37 - $42 a b) Size of Fleet Factor 2 : Profitability (17.5%) a) EBIT Margin (3 Year Avg) 2.5% 1% - 4% b) ROA (NPATBUI / Total Assets)(3 Year Avg) -0.8% 0% - 1% a) Debt / EBITDA (3 Year Avg) 4.5x Ba 3x - 3.5x b) RCF / Net Debt (3 Year Avg) 28.4% A 20% - 30% A 9.1x A 4x - 5.5x a) % Revenues from LT Charters b) Unencumbered Assets Factor 3 : Leverage and Coverage (30%) c) (FFO + Interest) / Interest Expense (3 Year Avg) Factor 4 : Fleet Characterestics (17.5%) Factor 5 : Financial Policy (15%) a) Financial Policy Rating: a) Indicated Rating from Grid 2 2 b) Actual Rating Assigned 3 [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. [2] As of LTM 9/30/2018. The cash flow figures include the impact of discontinued operations. [3] This represents Moody's forward view; not the view of the issuer. The ratios include the estimated impact of IFRS 16. Source: Moody's Financial Metrics 7

8 Exhibit 9 Peer Comparison A.P. Moller-Maersk A/S CMA CGM S.A. 2 RUR-DNG B1 Negative Hapag-Lloyd AG B2 Stable Dec-16 Dec-17 LTM Sep-18 Dec-16 Dec-17 LTM Jun-18 Revenue $27,266 $30,945 $37,277 $15,977 $21,116 EBITDA $4,732 $5,785 $5,787 $1,937 $3,690 $23,115 $27,962 $27,580 $15,874 $16,318 (in US millions) Total Debt Size of fleet (# ships) EBIT Margin ROA(NPATBUI)/Avg Assets Dec-16 Dec-17 LTM Sep-18 $22,299 $8,558 $11,269 $13,233 $3,138 $1,540 $1,831 $1,997 $16,703 $7,174 $10,494 $10, % 3.9% 1.8% 2.4% 9.0% 6.1% 3.3% 3.9% 3.5% -1.3% -0.3% -0.6% -2.1% 2.5% 1.2% -0.8% -0.2% -0.4% FFO + Int Exp / Int Exp 9.8x 8.0x 9.2x 2.3x 4.0x 3.5x 3.4x 3.6x 3.4x Debt / EBITDA 4.9x 8.2x 4.4x 5.3x 4.9x 5.4x 5.2x RCF / Net Debt 33.1% 25.1% 25.1% 7.4% 17.6% 14.0% 14.4% 15.0% 13.4% Source: Moody's Financial Metrics Ratings Exhibit 10 tegory A.P. MOLLER-MAERSK A/S Outlook Issuer Rating -Dom Curr Senior Unsecured Moody's Rating Stable 3 3 Source: Moody's Investors Service 8

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10 CLIENT SERVICES 10 Americas Asia Pacific Japan EMEA