Skyrocketing freight rates throughout 2020 and large volumes of container transport from Asia to the US and Europe caused earnings to become red-hot at Maersk, doubling the company’s “war chest” for new acquisitions to USD 20 billion in just a few months, projects investment bank Jefferies.
At the end of the third quarter 2020, Maersk had an “acquisition war chest”, as Jefferies calls it, of USD 9 billion. A few months later, this has been doubled.
According to the investment bank, container liners, including Maersk, have benefited from container transport demand bouncing back quicker than expected after the initial outbreak of coronavirus in 2020. Meanwhile, the liner companies tightly controlled the supply of container ships and container capacity.
As a result, we estimate Maersk’s “acquisition war chest” has increased to USD 20 billion
“This led to record freight rates and profitability. As a result, we estimate Maersk’s acquisition war chest has increased to USD 20 billion, accounting for circa 50 percent of market cap,” writes David Kerstens, equity analyst at Jefferies, in a new analysis about Maersk.
Logistics earnings must account for 50 percent
Maersk can use its plentiful finances to continue its “expansion in land-based container logistics,” writes Jefferies. The total logistics business must also contribute more to the total earnings, if Maersk is to become an “integrated container logistics company,” as its strategy states.
Maersk’s target states that 50 percent of the total operating income (EBIT) must come from its land-based logistics and service business. This target must be achieved before 2023.
According to Jefferies, Maersk is only halfway to meeting that target. Operating income (EBIT) from logistics and services “only” make up 25 percent of the total operating income. However, the analysis does not split earnings into business areas.
Looking at the operating income before depreciations and amortizations, EBITDA, logistics and services make up a mere 5 percent of the operating income. Meanwhile, the container business (Ocean) contributes 82 percent. It is, however, worth noting that Ocean has to earn more because depreciations and amortizations are greater here.
Three acquisitions within logistics
If the EBIT target is to be achieved, Maersk’s logistics business and earnings have to grow both extensively and quickly this year and in 2022. Alternatively, a more of the USD 20 billion “war chest” must be put to use to make acquisitions.
Since the target was announced, Maersk has made three acquisitions within logistics as well as combined Maersk Line and freight forwarder Damco. The acquisitions count Vandegrift, acquired for an unnamed figure, Performance Team, which cost Maersk USD 560.7 million, and in July 2020 Maersk also acquired KGH Customs in a deal worth USD 280.7 million.
After the acquisition of KGH Customs, Maersk CEO Søren Skou told ShippingWatch in August that Maersk is focused on acquiring competencies and technologies rather than volume and customers in its acquisition strategy in the logistics sector.
Talking about potential upcoming acquisitions, he said at the same time that Maersk will not make billion dollar-acquisitions such as its competitor CMA CGM did with the acquisition of Ceva Logistics
“We’re talking acquisitions in the hundred-million-dollar class, not billions. At least not for the next year or so,” said Skou.
And it should be done through so-called bolt on acquisitions in logistics, which are acquisitions that can be tethered onto parts of the existing business, the company has previously stated.
Not achievable before 2023
Kerstens tells ShippingWatch in an email that he expects Maersk to change its earnings target for the logistics business:
“I think the target may be revised, as it has become relatively more difficult to achieve after the recent surge in profitability of the Ocean segment, projected to account for 81% of EBITDA in FY20E and 85% of EBITDA in FY21E.”
Jefferies’ analysis comes just a few days before Maersk publishes its annual report for 2020. Here, the median expectation among 24 analysts that follow the world’s biggest container line is that Maersk’s EBITDA result will come to USD 8.5 billion. Jefferies’ estimate is in line with the median estimate.
In November 2020, Maersk upgraded its guidance for the full year to between USD 8 and 8.5 billion.
Jefferies expects Maersk’s result to come to USD 11.6 billion for 2021, which is based on a 3 percent improvement in volumes, 10 percent higher freight rates, which are somewhat counteracted by 10 percent higher bunker prices.
“With contract freight rates expected to be circa 30%-50% higher this year and current spot rates still more than double the FY20 average, earnings risk remains strongly to the upside,” concludes Jefferies.
Consensus among the analysts sits at USD 10.1 billion for 2021.
English Edit: Ida Jacobsen
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