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Analysis: Søren Skou adds a T&T variable to the AP Møller-Mærsk mix

Soren Skou2

Group chief executive Soren Skou

Mid-way through last week’s call between the management team of AP Møller-Mærsk (APMM) and sell-side analysts – when we were all busy paying attention to other matters – CEO Søren Skou (pictured above) introduced a new slide (see below) to the typical quarterly presentation of the Danish integrator of container logistics, noting:

“Slide 22, we are now providing you with some new disclosure on our gateway terminals business. What we have here is the equity weighted share of ebitda of all the entities that we have an interest in, in our gateway terminals. It’s the ebitda that we we hold in our consolidated gateway terminals after the minorities and our share of ebitda in JVs and associates.”

If those remarks sound a bit like Greek consider that the 2016-2017 IFRS-16 adjustment is a “high level estimate for comparability use only”.

But the trend-line is really cool if the idea were to market those assets.

There are a few other adjustments to be made, but the message APMM might be trying to convey to the financial community is that there is value in its Terminals & Towage (T&T) partnerships – from which it could possibly extract even more value.

In other words, where it’s invested in T&T with “others”, it’s growing adjusted operating cash flows (ebitda) while receiving hefty dividends – at 34% ($178m) out of the last twelve months of JVs/associates ebitda of $524m – with a dividend payout above net earnings. This is something income-driven investors would love to get hold of.

Regardless of market appetite considerations in those ventures, that slide followed a preliminary introduction of business trends that proves virtually all the bits and stats in T&T worldwide were in the right places in the third quarter.

(Source APMM)

(Source APMM)

As a reference, the unit’s quarterly revenue stood at just less than $1bn, with ebitda margin at over 30% (which is typical for such assets), versus sales of over $7bn for core ocean activities (see below) and $1.6bn for logistics and services, whose respective ebitda margins stood at 17.4% (with the help of IFRS-led adjustments) and 5.8% (ditto).

My personal interest in the first T&T JVs/associates slide and business unit was propelled by wild rumours this week concerning assets exploitation at APMM, particularly concerning its terminal assets and new venture with other prominent players.

Whatever the next corporate mission with old or new allies, here’s one obvious consideration: the ocean business is the backbone of APMM, and then its logistics unit must shine eventually – purely in terms of fundamentals rather than operationally, the latter could be a mid-tier, low-margin 3PL, if the vision is properly executed. What they are both worth now as part of the group is possibly the highest valuation they can can fetch already.

While other units have completely disappeared from its quarterly numbers – either those sold or subsidiaries such as Svitzer and Damco, once reported as separate entities, since 2019 barely mentioned in the quarterly – APMM consciously decided to give more visibility to T&T while elsewhere it doesn’t intend to expand on what its strategic thinking is.

As Mr Skou acknowledged, results were “dragged down by air and sea freight forwarding” while getting out of unprofitable countries and focusing on where it can compete boasting leadership is of paramount importance. Moreover, the restructuring of the air and sea business (Damco) is not close to being done and APMM will work on it in the near future.

However, it has big ambitions where margins are razor-thin.

Sales of logistics and services products to customers are in the pipeline, but “I don’t want to give more disclosure”, Mr Skou said, although it’s core for APMM to sell more land-based services and products to its 27,000 clients in ocean. APMM is receiving a lot of positive feedback from customers, and it could monetise more quickly if it had a competitive advantage in trucking/warehousing distribution/customs house brokerage solutions – “they will be happy to buy from us,” the boss said, at a time when the digital shift could be incredibly rewarding.

(Remember though my Maersk Spot coverage? This is what management said in their latest interim update on that front: “Maersk Spot, introduced in Q2 2019, saw further adaptation in the market, and at the end of Q3 Maersk Spot accounted for 12% of spot-volumes”.)

As it bids to become lighter and lighter in terms of capital deployment…

(Source APMM)

(Source APMM)

… the focus is on cost-cutting and network capacity, as well as shedding capex to levels we have never been used to, with $1.5bn the low end of the range annually for 2020 and 2021.

Freight forwarders versus ocean carriers and vertical integration in a low-growth environment is very a hot topic at a time when Mr Skou is mildly satisfied with rising ROIC (still below target levels) and other metrics as more steps to progress strategically and operationally are needed.

He made that clear last week – but hey, it could well be T&T moving the needle both in terms of corporate strategy and valuation for a stock that in the past few weeks has defied the law of gravity.

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