Moody’s Investors Service has affirmed the Baa2 long-term issuer rating of A.P. Moller-Maersk A/S, reports Yahoo Finance.
Outlook changes to positive
Concurrently, Moody’s has also affirmed the Baa2 senior unsecured instrument rating of the existing notes and the (P)Baa2 rating of the senior unsecured euro medium term notes (EMTN) programme both issued by the company. The outlook on all ratings has been changed to positive from stable.
“Maersk has continued to strengthen its operating performance over the previous quarters amid the favorable market environment for container shipping, efficiency improvements and a further vertical integration into logistic assets“, says Daniel Harlid, lead analyst for Maersk.
“Positive cash flow generation in conjunction with conservative shareholder remuneration has also enabled the company to significantly deleverage to a negative net debt position of $3.4 billion as of June 2022“, Mr. Harlid continues.
“While we expect the market conditions for container shipping to become more challenging going forward, a continued robust operating performance of Maersk combined with a balanced financial policy could support further positive rating pressure over the next quarters“, says Mr. Harlid.
Ratings rationale
The change in outlook reflects Maersk’s strengthened financial flexibility and credit metrics, driven by a strong market environment for container shipping and a continuous focus on increasing the share of ocean customers on long term as well as multiyear contracts over the last two years. In addition, the rising share of the terminals business and the increased scale and growing profitability of its logistics division is providing a higher degree of vertical integration and should improve the performance stability going forward.
The logistics business has doubled in size to $12 billion compared to $6.9 billion in 2020 and remains profitable with an EBITA margin of around 7% LTM in June. Additional investments in the terminal and logistics business have been funded with record free cash flow generation of Maersk, driven by an extraordinary market environment for container shipping.
Maersk has improved its credit metrics, resulting in a Moody’s-adjusted debt/EBITDA ratio of 0.5x as of June 2022 which is the lowest leverage ratio since the company decided to transform itself to an integrated shipping and logistics company in 2016, driven by EBITDA improvements and further debt reductions of around $647 million during the first half of 2022. Moody’s anticipates that the environment for container shipping normalises going forward, reflected in lower freight rates and transportation volumes. The Baa2 rating balances the company’s improved credit metric with downside risks, such as the potentially challenging next two years for the industry when the global fleet is poised to grow by around 8% annually (before scrapping/postponed deliveries).
Given that the macroeconomic environment has gradually weakened and is most likely to continue doing so in 2023, the capacity growth is considerably higher than market projections for demand growth of around 2% – 3% next year. Such a demand supply / gap has historically put negative pressure on freight rates and carrier profitability. Despite the expected softening of operating performance and modest weakening of credit metrics, the positive outlook reflects the likelihood that the company’s debt / EBITDA stays comfortably below 2.0x over the cycle, driven by capacity discipline, the more diversified business mix and the company’s disciplined financial policy.
Considering Moody’s expectation of continued strong operating cash flow generation over the next two to three years and disciplined capex, the company has financial flexibility to both engage in moderate M&A activity as well as following its financial policy to pay out 30-50% of the underlying net result to shareholders in dividend. Consequently, Moody’s expects that free cash flow, although likely negative in 2023 reflecting larger than usual dividend payments, continues to be positive after potential share buybacks through the cycle.
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Source: Yahoo Finance
