The CMA CGM CHRISTOPHE COLOMB
The CMA CGM CHRISTOPHE COLOMB

The entrance of CMA CGM into the logistics industry last month, when it joined the capital raise and IPO of CEVA Logistics was more a game-changer for the latter than for the French carrier, but it did reinforce my view that the shipping company might be reaching a point where stock investors could comfortably accept it as an industry benchmark worth investing in.

Out of the top five, not only it is now not only the most profitable global container line, but also one strategically ready to fight.

Thus it is easy for me to speculate that its shares would have appreciated rapidly when the tie-up with CEVA was announced – if only it had been a public company.

FcF

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The most impressive number contained in its 2017 annual results was unadjusted record free cash flow of $1.6bn, which allows us to make some assumptions on its possible market value.

Free cash flow (FcF) is, essentially, the amount of spare cash that companies can use to redeem debt, pay dividends and fund share repurchases.

Here is how it trended in the past years.

FcF 2017 (CMA CGM)

 

FcF 2016 (CMA CGM)

 

FcF 2015 (CMA CGM)

 

The best two consecutive years in terms of FcF, as the table below implies, were 2013 and 2014, essentially just before deal-making started to build momentum in the industry.

FcF 2014 (CMA CGM)

Cyclical swings

We arguably need to make some adjustments to derive core FcF, but those numbers suffice to testify to trends that are typical in the industry.

For all the major players, FcF is a highly volatile number, because it depends on the heavy investment cycle, so it could significantly change year to year. But say that last year’s free cash flow yield of a listed CMA CGM could have been a massive 15%, its implied market value comes in at $10.6bn, for a share price of about $700, based on its current total shares outstanding (about 15m).

(Market value equals annual FcF/FcF yield, or $1,600/15% = $10.6bn)

Here, I am assuming it won’t need to raise new equity at an IPO, given its rising cash flows, vessel investment plans and funding needs.

Its implied enterprise value (EV) would be $17.5bn, excluding minorities – around 1.6x Hapag-Lloyd’s EV.

Net debt end of 2017 (CMA CGM)

Any sense?

Notably, that valuation is consistent with my approach at liquidation value, which assumes $5.6bn of current assets are worth 100% against book values…

Balance sheet end of 2017 (CMA CGM)

… and $8.6bn of vessels are booked at about 70 cents on the dollar.

Non-current assets end of 2017 (CMA CGM)

On a comparable basis, it is hard to draw from financial metrics of other box shipping lines, given that Maersk Line is not independently listed (and is in restructuring mode anyway); Hapag-Lloyd mainly remains a fully priced recovery story; as does Cosco Shipping Holdings, in different ways; while MSC doesn’t disclose its numbers.

Another methodology is to discount its adjusted ebitda line to gauge the three-year net present value of its cash flows and derive fair value for its stock; and here I arrived at a more volatile price range. It did, however, confirm that about $10bn (implied EV/adjusted ebitda of between 8x and 8.5x; EV/revenues of 0.8x; and price-to-book value of 1.9x) could make sense at IPO.

That price, based on forward earnings, which are assumed stable year on year, would give its stock a price-to-earnings (p/e) multiple of 15x, against Hapag’s projected p/e of 20x, which is set to drop significantly in 2019 and 2020 if the German carrier delivers.

Its balance sheet is levered, but its debt position if manageable if cash flows keep rising, so for the time being it is safe to assume new equity might not be needed. Moreover, it could also be smart to set the price without diluting existing holdings, and later test the market.

CMA CGM doesn’t strictly need to issue new equity capital, given capital ratios trends and other factors, but it might decide otherwise to fund its ambitious capex investment (new orders) and other ancillary activates.

If that was the case, all the aforementioned numbers would change, but I am comfortable with an implied equity value of about $10bn, combined with a base-case scenario according to which its existing equity base is solid enough to get away with a decent price at IPO.

Landscape

The rise in share price of the world’s largest ship lessor, Seaspan – whose value has rapidly doubled thanks to deal-making and other elements concerning its capital structure – reminds us that the leaders in the container shipping industry, and its suppliers, are not immune to massive swings, up and down.

SSW share price (Google)

Now the question is how CMA CGM wants to position itself strategically in terms of capital allocation, either with or without a float. I have had some fascinating discussions recently with banking sources who indicated that deeper ties with a US-based player, such as XPO Logistics, could be the next logical step after the group grabbed a near-25% stake in CEVA Logistics.

The French carrier sold a 90% stake in LA container terminal for $817m last year, principally because it was looking at ways to alter its capital requirements where returns are more cyclicals, we could well argue.

Is that important?

CMA CGM has often done the right thing at the right time in the past 18 months, and the CEVA deal proves strategic partnerships are one way forward. That tie-up was unique per se, as the opportunity to build a stake in a major contract logistics and freight forwarder doesn’t come along often at a good price. But as one of our readers recently asked on our wall… “couldn’t the consolidation come the other way around?”

The reader noted: “K+N is already a 17% holder, second largest, in Hapag and the only owner in the register which potentially really wants to be a long-term owner. So, if there is sense in putting together a forwarder and a shipping company, that would be the obvious way to go. It is a big question now as you have Maersk/Damco, and CMA/CEVA.”

That’s a brilliant angle, although my first remarks were that most container shipping companies have rather complex shareholding structures and it is highly unlikely, on that basis, that a carrier will ever be fully consolidated by a freight forwarder and/or any other asset-light companies.

(It also has to be mentioned technically that 17% stake in Hapag-Lloyd is held by a Klaus Michael Kuehne fund, rather than an investment on K+N’s books and the 3PL’s executives have always maintained that there is no connection between the two companies other than the buy-sell relationship they enjoy today.)

Of all companies I monitor, DSV’s long-promised M&A action shows that there remains little interest for sellers to join the DSV family at any price – which, perhaps, could lead to a different type of investment in the supply chain? But I doubt asset-heavy targets are among them.

DHL Global Forwarding, DB Schenker Logistics and Expeditors – which trail Kuehne + Nagel in the global air and sea freight rankings by total revenues – are unlikely to risk that much to get deeper ties in the container shipping industry, while a forwarder of any other size would have to seriously reconsider its business plans.

Also, virtually no freight forwarder world has the firepower to take over a container shipping line with global exposure. But the leading ocean carriers, of course, could use more debt to fund the direct purchase of shareholdings or build stakes in public companies whose stock is freely available on the market.

COMMENTS 2


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  • a.kout@web.de

    May 21, 2018 at 3:37 pm

    XPO which we knew quite good and have excellent links into strategy and philsophy doesnt fit into your points raised no interest in a Transpac nor Transatlantic acquisition,fo cus on contract logitics,e-commerce tis all doesnt really give up a match
    with your points Sir.

    Lying in bed with one shipping line from a forwarder s perspective is tricky and dangerous as it gives your competiorors the best tool in hand to sell you as
    a freight forwarder linked to a certain shipping line, dont forget the Maersk/Daco link, that´s the same and in our mind the main point why Damco doesnt generate the global growth they could have if they wouldnt be part of Maersk and would act and operate neutrally.
    A.Kout
    Akclimited

    Reply
  • a.pasetti@yahoo.co.uk

    May 22, 2018 at 9:47 am

    Hi A.Kout,

    Thanks for your comment.

    I think we broadly agree on the FF/container shipping line tie-up angle, although APMM/Damco is a rather unique corporate story, also in terms of managerial decisions over the past couple of years, right?

    Am not entirely sure what is the point you are making on XPO, given what I wrote: ” I have had some fascinating discussions recently with banking sources who indicated that deeper ties with a US-based player, such as XPO Logistics, could be the next logical step after the group grabbed a near-25% stake in CEVA Logistics.”

    Could you clarify that ?

    Best Regards,

    Ale

    Reply