The past couple of years were spectacular for shipping companies. Strong global demand for goods and supply bottlenecks have pushed freight and charter rates higher, significantly boosting the profits and share prices of companies operating in this space.
While the broader markets reversed gains amid the recent selloff, shares of Hapag Lloyd (LSE:0RCG), Pangaea Logistics Solutions (NASDAQ: PANL), and A.P. Moeller Maersk (LSE: 0O77) are still up over 50% in one year.
Amid a favorable operating environment and their strong financial position, shipping companies are adding capacity, investing in new vessels, reducing debt, and even expanding in the air cargo space.
For instance, A.P. Moeller Maersk expanded its capacity by 6.4% in 2021 and launched the air cargo service last year. Meanwhile, Hapag Lloyd invested in new vessels.
More recently, the CMA CGM Group, a French shipping and logistics company, announced plans to take up a stake in Air France-KLM Group and combine their air cargo businesses to capitalize on the strong demand.
Now What?
The supply chain inefficiencies have not abated while demand sustains, implying that shipping companies could continue to benefit from higher freight rates in the short term before things normalize.
Hapag-Lloyd’s CEO, Rolf Habben Jansen, stated during the Q1 conference call that 2022 got off to a solid start. While he acknowledged that there are “signs that the market has passed its peak,” he expects Q2 to remain strong. Hapag-Lloyd stated that it significantly reduced its net debt in 2021. Meanwhile, it raised its earnings forecast for 2022.
Meanwhile, A.P. Moeller Maersk also delivered stellar Q1 performance and raised its 2022 forecast. The company increased its full-year EBITDA and free cash flow projection due to the exceptional market situation and higher rates. Like Hapag-Lloyd, the company also significantly reduced its interest-bearing debt, which is positive.
However, A.P. Moeller Maersk now expects the global to increase or decrease by 1% in 2022. This compares unfavorably to its previous forecast of 2-4% growth, implying a decline in demand.
In response to A.P. Moeller Maersk’s Q1 performance and outlook, Deutsche Bank analyst Andy Chu stated, “We expect profits to normalize at some stage but the short-term outlook (for 2022) in our view looks positive given the disruption we are seeing, due to the Chinese lockdowns.”
It’s worth mentioning that Chu downgraded both A.P. Moeller Maersk and Hapag-Lloyd stocks to Hold in March, citing deceleration in demand in the second half of the year and easing of port congestion. However, the analyst still expects these companies to deliver “record profit and FCF” in 2022.
In line with its peers, maritime logistics solutions provider Pangaea Logistics Solution also delivered robust Q1 performance benefitting from solid market fundamentals and higher rates. While the overall normalization in the demand trends could impact its performance, its dominant positioning in the ice-breaking fleet industry could continue to support its growth, highlighted Noble Financial analyst Michael Heim.
Bottom Line
The higher freight rates and demand will likely support the profitability and drive free cash flows for shipping companies in 2022. However, the demand could normalize as more capacity is added to the market.
Further, record-high inflation, tightening of the monetary policy, and continued weakness in China, point to a slowdown in economic growth, which could pressure shipping companies and their stock price.
Given the expected normalization in growth, analysts are no longer bullish on Hapag-Lloyd and A.P. Moeller Maersk stocks.
On TipRanks, Hapag Lloyd stock sports a Moderate Sell consensus rating based on three Hold and two Sell recommendations. Further, the average Hapag-Lloyd price target of €228.60 implies a sharp downside of 49.1% to current levels.
Meanwhile, for Maersk, the stock has received one Buy, three Hold, and one Sell recommendations for a Hold consensus rating. Further, the average price target of kr22,611 implies 10.9% upside potential to current levels.
As for PANL, the stock has received two unanimous Buy recommendations for a Strong Buy consensus rating due to its niche in the ice-breaking fleet industry. Moreover, its average price target of $7.50 implies 28% upside potential.
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