Maersk Rakes in the Booty, But Stormy Seas Await

Maersk Rakes in the Booty, But Stormy Seas Await #Maersk #Rakes #Booty #Stormy #Seas #Await Welcome to Lopoid

Global supply-chain disruptions are keeping the good times rolling for container shipping companies. But if the global economy continues to worsen, customers may start pushing harder to renegotiate contracts—meaning still-rosy earnings expectations could need to be cut.

Danish container-ship company

A.P. Moller-Maersk,

MAERSK.B 4.91%

which moves 17% of the world’s shipping containers and is a bellwether for global trade, reported its 15th straight quarter of earnings growth on Wednesday. It raised its profit forecast for the second time this year and now expects underlying earnings before interest and tax will be around $31 billion in 2022. Smaller peer

Hapag-Lloyd AG,

HLAG -0.56%

the world’s fifth-largest shipping line, also raised its profit forecast last week.

Maersk’s outlook for trade volumes, however, is less rosy. It bumped down its guess for global container volume growth in 2022 to the lower end of the previously forecast 1% to -1% range. Maersk expects a gradual normalization in ocean trade in the fourth quarter as congestion eases and more capacity comes online.

Spot rates have in fact already started softening even though they still sit far above prepandemic levels. The World Container Index compiled by London-based Drewry Shipping Consultants is down 27% since the beginning of the year. Container shippers, however, have contracts locked in at relatively plump rates even if spot rates decline. Customers, anxious about seemingly never-ending supply-chain snarls, are committing with carriers for longer.

Long-term contracts are at rates below spot levels but significantly above contract levels in the past. Maersk said it now has 71% of volumes on contract—and that its average contract rate for 2022 is around $1,900 per 40ft box (FEU) higher than in 2021.

According to

Jørgen Lian,

shipping analyst at

DNB Markets,

Maersk and other shipping companies have done a good job securing revenue from this upcycle and limiting sensitivity to spot rates. To continue their winning streak, though, they will have to push back against demand for renegotiations—which tend to materialize when overall demand softens. Shipping demand faces a potentially tough blow with global growth slowing just as consumers are shipping demand back toward services as economies move past Covid-19.

Every day, millions of sailors, truck drivers, longshoremen, warehouse workers and delivery drivers keep mountains of goods moving into stores and homes to meet consumers’ increasing expectations of convenience. But this complex movement of goods underpinning the global economy is far more vulnerable than many imagined. Photo illustration: Adele Morgan

Container-ship operators reaped very strong profits over the past two years, and the post-Covid-19 normalization has taken longer than expected. As a result they are trading at very attractive earnings multiples even after a big share price run-up since 2019. For example, Maersk’s enterprise value currently sits around 2.4 times next 12 months’ expected earnings before interest, taxes, depreciation and amortization according to

FactSet

—compared with around four for most of the early and mid-2010s.

Rosy earnings expectations underpinning that low multiple may be justified by sticky, robust contract prices and still-gummed up ports. But eventually more customers are probably going to start pushing back.

Write to Megha Mandavia at megha.mandavia@wsj.com

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