The Drewry container stock index ended its three-year winning streak in 1H22
IIn 1Q22, the favorable macroeconomic environment, supported by strong consumer demand, was brutally challenged by the war between Russia and Ukraine. Lining stocks initially held up given the marginal contribution of Russia and Ukraine to global international trade, but this soon began to affect energy prices as Russia is a major energy exporter, pushing inflation already high in major economies on several levels. highs of the decade. To curb inflation, central banks in major economies raised interest rates, sparking speculation that an aggressive tightening of monetary policy could tip the global economy into recession. As a result, stock markets plunged around the world and understudy stocks were no exception. The Drewry container stock index ended its long three-year winning streak in 1H22. On a YTD basis (until June 28, 2022), the index shows a drop of 23.1% (vs 2021: +127.7%, 2020: +79% and 2019: 36.2%).
The Drewry Container Equity Index is a market capitalization weighted index of 12 companies, including AP Moeller-Maersk A/S, Hapag Lloyd AG, Orient Overseas (International) Ltd, Evergreen Marine Corp Taiwan Ltd, Wan Hai Lines Ltd, Yang Ming Marine Transport Corp, HMM Co Ltd, Regional Container Lines, COSCO Shipping Holdings Co Ltd, SITC International Holdings Co Ltd, Matson Inc and Samudera Shipping Line Ltd.
With liner stocks down around 25% in 2022, the question is, is this the right time to invest in these stocks?
Despite the looming risks, the annual performance could still be better than the previous year
According to our latest container market forecast published in June 2022, we expect supply chain constraints to continue in 1H23. While this should improve the performance of transmission lines in the current year, rising operating costs raise concerns amid rising crude oil prices. We expect some impact on operating margins, but the overall annual performance could still be better than the previous year (2021).
The main players in the sector have revised their forecasts for the year 2022 upwards
In line with our expectations, container companies posted strong results in 1Q22 with average revenue up 79.4%, EBITDA up 174.4% and EBIT up 152.7%. With only one quarter left in the year, the two main players in the sector – Maersk and Hapag-Lloyd – have already revised their forecasts for the year 2022 upwards.
Huge cash reserves could cushion falling freight rates
Due to high operating cash flow, all operators’ balance sheets are flooded with cash, which has led to large cash balances. In 2021, liners deployed this cash primarily to bolster their operational capabilities by opting for both organic or inorganic (vertical + horizontal) growth instead of paying exceptionally high dividends or paying down debt. Despite this, most of the overall income was set aside for bad weather. As a result, while the industry’s overall gross debt has remained almost stable, most companies now have net cash (or negative net debt), which could cushion the decline in freight rates in the short to medium term. . Furthermore, hindsight strongly suggests that in the recent past, many industry players have opted for profitability instead of gaining market share, which clearly limits the scope of any price war in the foreseeable future.
Altman Z-score suggests liners are in the safe zone
Altman’s Z-score, based on the latest quarterly data, of sampled companies clearly indicates that all line companies are in the safe zone.
DMFR uses a simple traffic light system to rank companies’ risk profiles based on their “Altman Z score”, which is the result of a solvency test that assesses a company’s likelihood of bankruptcy. The Z-score ranks each company’s risk profile based on five financial ratios: profitability, leverage, liquidity, solvency and activity to predict whether a company has a high probability of being insolvent.
A Z-score of 2.99 or greater indicates that the business is “safe” (green), based on these financial numbers alone. A Z-score between 1.8 and 2.99 indicates caution (orange), based on these financial numbers alone. A Z-score below 1.8 indicates a higher risk of business failure – “distress zone” (red), based on these financial numbers only.
P/B and EV/EBITDA suggest the industry is currently trading in an undervalued zone
Drewry’s analysis highlights strong industry fundamentals that make a strong case for investing in shipping companies from a long-term perspective. We also looked at relative valuation to confirm whether investors should consider investing in line stocks at current sector valuations.
P/BV and EV/EBITDA analysis of Drewry’s Broad Container Equity Index suggests that the sector’s current valuation is below the long-term historical average, providing an opportunity for investors in shares. However, the downside risk could be a faster rise in interest rates that will eventually lead to a recession and wipe out consumer demand. We suggest in-depth analysis of company-specific factors to select individual winners for investment.