CMA CGM - Maersk Q2 20 results comments

All,

Maersk’s Q2 20 results confirm the improving trend in container shipping. The group, which had previously withdrawn its USD5.5bn EBITDA guidance for 2020 in March, has now reinstated and upgraded it at USD6-7bn. Maersk sees volumes improving from -16% yoy in Q2 20 to a “mid-single digit” contraction in Q3 20. And Maersk’s “Ocean” division has a very helpful slide showing how the impact of volume declines in Q2 20 EBITDA were more than offset by favorable variations in freight rate, fuel costs, and the impact of a reduction in sailings.  

During the call, the CEO noted that, in contrast with the 2009 crisis, Maersk has reduced capacity to meet the reduction in volumes, and is only cautiously adding back, with a expect market share loss on volumes for 2020. This suggests to us that Maersk decided to lead the effort to conservatively rightsize supply and demand this time around, and it bodes well for CMA CGM.

We remain long the 2021 and 2022 notes, as we see very little risk of default over this time horizon, given CMA CGM’s strong liquidity position and operating momentum over the next 6-12 months at least. The 2025 notes remain a riskier gamble on the ability of the industry to make this newfound price discipline stick, on the successful turnaround plan for Ceva, and other factors of long-term sustainability of CMA CGM’s debt. At this point, the yield on the 2025 notes remain the key threshold the group needs to cross to successfully refinance its debt. While September/October may bring a strong high yield market environment that could finally allow these bonds to be refinanceable, despite the uncertain fundamentals, we note that CMA has been here on the edge before, most notably in early 2020, but has so far never manage to cross this line.

 
Please feel free to reach out if you would like to exchange ideas on the name. 

Juliano