September 29, 2021

AP Moeller-Maersk: Loving Life on the Sea

by Tajinder Dhillon.

As highlighted in a prior note (Data Insight: Soaring Ocean Freight Rates), shipping costs have soared over the last 18 months as bottlenecks in supply chains and increased consumer demand have put a strain on the shipping and logistics industry.

AP Moeller-Maersk A/S (RIC: MAERSKb.CO), the world’s largest container shipping company, has been a strong beneficiary of this pricing environment. The Danish company has seen shares rise 47.6% year-to-date, which is the best year-to-date performance since 2005.

Management has raised guidance three times this year, most recently on Sept. 16. It anticipates full-year earnings before interest & tax (EBIT) to reach $18-19 billion, which would be the highest annual operating profit on record. To put this in perspective, analysts had originally anticipated FY 2021 EBIT of approximately $4.0 billion at the beginning of the year compared to the current I/B/E/S consensus estimate of $16.3 billion as shown in Exhibit 1.

Exhibit 1: FY 2021 EBIT Estimates

Source: Refinitiv Eikon Workspace

In the most recent quarterly results, management commented on the Goldilocks operating environment for its Ocean Maersk segment. “Ocean was impacted by continuation of the exceptional market conditions driving up both long-term and short-term freight rates as a strong rebound in demand led to equipment shortage and bottlenecks.” (Source: 21Q2 Earnings Presentation).

Ocean Maersk is the largest segment, representing 77.8% of total company revenue. Ocean Maersk reported 21Q2 earnings before interest, tax, depreciation, and amortization (EBITDA) of $4.4 billion compared to $1.357 billion a year ago which results in a year-over-year growth rate of 224.2%. The segment also yielded an EBITDA margin of 39.7%.

This helped the overall business achieve an EBITDA margin of 35.6%, which is the highest quarterly margin since 2012, as shown in Exhibit 2.

Exhibit 2: AP Moeller-Maersk A/S EBITDA Margin

Source: Refinitiv Eikon Workspace

How does Maersk look from a StarMine perspective?

We start with the multi-factor Combined Alpha Model (CAM), which incorporates all available alpha StarMine models in an optimal, static, linear combination. Maersk has a CAM percentile rank of 100 based on its peers in Developed Europe and has achieved the highest score possible, as shown in Exhibit 3.

CAM provides a single holistic score that tells a user very quickly that the company looks attractive across multiple pillars. For example, we can see the company has strong momentum in the form of stock price appreciation and bullish sentiment among analysts. Yet the stock looks cheap on a valuation basis as defined by the Relative and Intrinsic Valuation models. The company has strong earnings quality and fundamentals are well-aligned to institutional investor preferences as defined by the Smart Holdings model.

Component details are provided within Refinitiv Eikon Workspace allowing for complete transparency and drill-down capabilities to provide granular insights.

Exhibit 3: CAM Model Score for AP Moeller-Maersk A/S

Source: Refinitiv Eikon Workspace

Drilling down into the individual models, we start with the Analyst Revisions Model (ARM). ARM is a stock ranking model that is designed to predict future changes in analyst sentiment by looking at changes in estimates across EPS, EBITDA, Revenue, and Recommendations over multiple time periods. As per Exhibit 4, Maersk has an ARM percentile rank of 100, again the highest score possible.

Exhibit 4: ARM Model Score for AP Moeller-Maersk A/S

Source: Refinitiv Eikon Workspace

Looking at the model components in Exhibit 5, analysts have consistently increased estimates (in part due to company guidance) across revenue, EBITDA, and EPS for the current quarter, current year, and upcoming year. The blended mean change shows double digit increases for EBITDA and EPS and a positive Predicted Surprise (PS) across all measures and all time periods.

What is more interesting is the relationship between the SmartEstimate (gold line) and Consensus Estimate (blue line). The SmartEstimate overweights analysts who are more accurate and timelier, hence providing a “refined view” into consensus.

We see across all measures and time periods that the SmartEstimate is consistently higher than consensus. The SmartEstimate can be seen as a leading indicator and predictive of future analyst revisions, as the consensus is consistently playing “catch-up” to the SmartEstimate. As the consensus estimate increases via analyst upgrades, this can have a material impact on the stock price.

We discuss the SmartEstimate and Predicted Surprise in more detail later.

Exhibit 5: ARM Model Score for AP Moeller-Maersk A/S

Source: Refinitiv Eikon Workspace

Moving from momentum, we look at the Relative Valuation (RV) model which identifies companies that are cheap or expensive by looking at six fundamental ratios: earnings/price, cash flow/price, EBITDA/EV, sales/EV, book/price and dividends/price.

As shown in Exhibit 6, Maersk has an RV model rank of 98 based on peers in Developed Europe. Furthermore, Maersk has a RV model rank of 98 within Denmark, 100 within its sector (Industrials), and 94 within its sub-industry (Marine).

Exhibit 6: RV Model Score for AP Moeller-Maersk A/S

Source: Refinitiv Eikon Workspace

With the share price near record highs, it can be slightly puzzling to see how Maersk ranks so highly in this model (a high model score indicates a company is “cheap”). Looking further at Exhibit 7, we can see the underlying valuation ratios on a forward 12-month basis (the model also incorporates trailing 12-month ratios).

Maersk is currently trading below both its relative sector and sub-industry on a F12m basis across all valuation metrics while also paying a higher dividend. A home-run example for value-based investors.

Looking at the forward P/E, Maersk is currently trading at 5.9x vs. a sub-industry median of 10.0x and a sector median of 15.8x. When dissecting the ratio for Maersk, we note that the F12m earnings per share estimate (i.e., denominator of the ratio) is currently a remarkable $457.75 per share compared to $131.03 at the beginning of the year.

Therefore, the denominator (earnings per share) for Maersk has significantly outpaced the rise in share prices, which makes the stock look “cheap” on a valuation basis.

Exhibit 7: RV Model Score for AP Moeller-Maersk A/S

Source: Refinitiv Eikon Workspace

Using Refinitiv Eikon Excel, we can create our own peers table to view these figures in more detail. Exhibit 8 highlights Maersk vs. a basket of peers in the same sub-industry.

We arrive at a similar picture where Maersk is undervalued vs. its peers across multiple metrics. For example, the forward P/E of 6.4x is below the average and median peer group, and trading at a 57% discount to its historical 10-year average of 14.9x.

A similar observation is seen when looking at the forward EV/EBITDA ratio of 3.7x, a 31% discount to its historical 10-year average of 5.3x.

Exhibit 8: Peers Analysis for Marine Sub-Industry

We now look at the StarMine Smart Holdings Model (SH) which predicts forward changes in institutional buying and selling by determining which factors are currently favored by institutional investors and which stocks are becoming more or less desirable in the current environment. Twenty-five fixed factors across volume, price momentum, profitability, value, growth, analyst revisions and leverage are utilized and ranked from most popular to least

As shown in Exhibit 9, Maersk has an SH model rank of 96 within Developed Europe and 95 within its sub-industry. A high score is intuitive given the strong price and earnings momentum coupled with robust financials and attractive valuation metrics.

Exhibit 9: SH Model Score for AP Moeller-Maersk A/S

Source: Refinitiv Eikon Workspace

Looking ahead to 21Q3 earnings release

Maersk is expected to report 21Q3 earnings on Nov. 2, and is looking to continue its streak of 11 consecutive quarters of positive year-over-year earnings growth. The consensus EPS estimate is currently $205.04 per share. However, the SmartEstimate is significantly higher at $243.23 per share, which overweights analysts who are more accurate and timelier.

By comparing the SmartEstimate vs. consensus, this results in a Predicted Surprise of 18.6% as shown in Exhibit 10. Research shows that when the PS is greater or less than 2% / -2%, it will accurately predict the direction of earnings surprise 70% of the time. In other words, it is probable that Maersk will report earnings above analyst expectations.

Similarly, we also see a positive 21Q3 revenue PS of 3.6%.

Exhibit 10: EPS & Revenue Predicted Surprise

Source: Refinitiv Eikon Workspace

For now, it appears that the party will continue as CEO Soren Skou told Reuters, “nothing in our data suggests that the situation will change this year,” and expects global trade volumes to grow 7%-8% this year compared with 2020. “We see very, very strong end-user demand combined with re-stocking and the fact that capacity in ports, warehouses and on ships is not fully utilized due to COVID-19,” he said.

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