Hapag-Lloyd: Still At The Mercy Of The Downcycle

seekingalpha03-21

Hapag-Lloyd Aktiengesellschaft has officially entered loss-making territory.Pressure looks set to ramp up on both sides of the P&L.Valuation-wise, investors still aren’t getting a lot of safety margin...

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Moeller-Maersk A/S","ZIM.AU":"ZIMPLATS HOLDINGS LTD","ZIM":"以星航运","EVGQF":"Evergreen Marine Corp. Ltd.","QSD.SI":"Resources Gbl"},"translate_title":"哈帕格—劳埃德：仍受下行周期的支配","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"AMKAF":1,"CICOF":1,"EVGQF":1,"HPGLY":1,"OROVY":1,"ZIM":1,"ZIM.AU":1,"QSD.SI":0.9},"content_text":"Hapag-Lloyd Aktiengesellschaft has officially entered loss-making territory.Pressure looks set to ramp up on both sides of the P&L.Valuation-wise, investors still aren’t getting a lot of safety margin here.VanderWolf-Images/iStock Editorial via Getty Images As I cautioned previously might happen (see Hapag-Lloyd: Headed For Near-Term Losses), Hapag-Lloyd Aktiengesellschaft (OTCPK:HPGLY) posted an operating loss for its latest quarter. Minor positives from non-freight revenues aside, most of the Q4 commentary was also rather pessimistic, particularly with regard to a still unfavorable supply/demand backdrop. Yes, Red Sea disruptions will probably drive a small near-term windfall in Q1, but as management pointed out in its guidance, industry conditions are so bad that spot rates will most likely trend down into the back half - even if disruptions extend a few months longer. So, while the company did announce a big dividend to end the year, I would be very cautious about underwriting the sustainability of this payout going forward. As for the stock valuation, the post-earnings de-rating means it is cheaper than before, though at the current premium to book, there isn't particularly compelling value here. Data by YCharts Volumes Up, but Stalling Out It's been a tale of two halves for Hapag-Lloyd; its full-year EBIT may seem decent at EUR2.7bn, but a Q4 operating loss highlighted how things have turned for the worse in recent months. There were some silver linings in the top line numbers, to be fair, particularly on volumes, which were up 4.7% YoY on resilient global demand. Hapag-Lloyd Per management, YoY volume growth has stayed positive in the initial months of 2024 as well - despite challenges in the Red Sea. For context, Hapag-Lloyd has, like its major shipping peers, avoided the Red Sea since December last year, instead rerouting to the longer Cape route on safety grounds. The base case, again in line with peers, is to return to the Red Sea in the second half of 2024, which may or may not prove optimistic. Yet, the bigger takeaway, in my view, is that Hapag-Lloyd expects volumes only \"increasing slightly\" in 2024 (likely low-single-digits %) if we do return to normalcy by H2. This may be well above the +0.5% YoY growth in 2023 but seems quite disappointing given the recent traction. Hapag-Lloyd Rates Volatile but Poised to Normalize Lower The needle-mover, though, remains freight rates, which have spiked in recent months amid the Red Sea turmoil. For Q4 2023, though, Hapag-Lloyd reported a worrying downward trend in its average rates (-55% YoY), a sobering reminder of how bad the underlying supply/demand dynamics are for liners. Yes, escalation in the Red Sea has given the industry some reprieve, at least on rates, though management's expectation that spot rates are at or past peak implies any windfall gains won't extend beyond Q1 2024. Hapag-Lloyd In any case, rates are already back on the decline, and more new deliveries are coming onstream, so I would be very cautious about going against the grain here. Plus, commentary from Hapag-Lloyd and the rest of the industry indicates contract negotiations have been pushed out (likely until rates normalize a lot lower) - a telling sign of where the bargaining power currently resides across supply chains. Drewry Profitability Unlikely This Year; Breakeven Is The New Target Also concerning is the growing pressure from costs, which have gone up significantly in recent years - despite Hapag-Lloyd's policy of hedging a large chunk of its variable expenses. The problem here isn't just cyclical, it's secular across the industry. In particular, the regulation shifts from high to low sulfur fuel; while Hapag-Lloyd has led on compliance here (nearly 90% of its operations are low sulfur), it has come at the expense of profits. Adding to the P&L pressure is the wage inflation the company has taken on post-COVID, which it hasn't been able to pass on. As a result, the company slipped into operating losses in Q4 and expects to only manage EBIT breakeven (at the mid-point of its -EUR1.0bn to +EUR1.0bn range) and EUR1.0-3.0bn of EBITDA (down ~55% YoY at the mid-point). Hapag-Lloyd In the context of a windfall Q1 2024, the result of a big Red Sea-driven uplift, this EBIT guidance understandably disappointed the market (note the big selloff post-earnings). It's worth noting, though, that this is an industry-wide issue - comparable shipping companies all provided similarly poor guidance on account of structural overcapacity more than offsetting any transient Q1 gains. In fact, Hapag-Lloyd may even have been a tad optimistic, given its numbers are above key European peer A.P. Møller - Mærsk A/S (OTCPK:AMKAF) or 'Maersk' which guided for a full-year loss in its core shipping segment. Either way, until the industry digests the next wave of vessel deliveries, expect a fair bit of volatility around the near-term guide. All Eyes On Competitive Dynamics As The Industry Fragments Into Q4 reporting, Maersk and Hapag-Lloyd had announced a new \"Gemini\" collaboration from early 2025, effectively creating the third-largest shipping alliance after Ocean (comprising COSCO SHIPPING Holdings Co., Ltd. (OTCPK:CICOF), Evergreen (EVGQF), CMA CGM, and Orient Overseas (International) Limited (OTCPK:OROVY)) and ZIM Integrated Shipping Services Ltd. (ZIM). As the split is 60/40, Hapag-Lloyd will be putting most of its fleet into this new network, with Maersk's share implying upwards of 290 total vessels in the \"Gemini\" network. Hapag-Lloyd At first glance, the tie-up seems very complementary; for Hapag-Lloyd, access to Maersk's network and advancements in \"green\" fuels means it will probably be better off. While the focus seems to be on service (industry-leading 90% schedule reliability target) and connectivity rather than price, there's no telling how the industry will react. For context, the breakup of 2M (Maersk/MSC) and Hapag-Lloyd's transition out of THE Alliance will create a far more fragmented landscape in early 2025. This typically incentivizes stiffer competition for market share, which, in turn, implies more pricing pressure, particularly with many carriers still operating with net cash balances. In the meantime, scaling up the \"Gemini\" offering will take time, so competitors could capitalize by adding capacity or forming new alliances to counter this new threat. In sum, all signs point to rates moving lower, not higher, over time. Flexport Final Thoughts Hapag-Lloyd has been a serial underperformer in recent months, largely on account of some very challenging industry dynamics. The supply/demand balance may have temporarily tightened due to Red Sea disruptions, but the underlying dynamics haven't changed; the company's breakeven guidance for this year (at the EBIT level, never mind net profit) was a sobering reminder. Unlike peers like COSCO Shipping (see COSCO Shipping: Still An Overly Discounted Shipping Play), the stock isn't dirt cheap either, and paying a book value premium for a shipping name mired in a particularly vicious downcycle leaves very little margin for error. The high-single-digit % dividend yield for 2023 helps but likely isn't sustainable given the likelihood Hapag-Lloyd will be burning, rather than generating, cash this year. Pending a line of sight into an industry-level turnaround, I would steer clear of Hapag-Lloyd Aktiengesellschaft stock. Data by YCharts  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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