Stuart Mitchell presented his in-depth investment thesis on A.P. Moller-Maersk (Copenhagen: MAERSK) at European Investing Summit 2017.
A.P. Moller-Maersk is the world-leading Danish container shipping and energy group. The business is split into four key divisions: container shipping (56% revenue), oil and gas (14% revenue), terminals (11% revenue), and drilling (6% revenue). In the wake of the dramatic decline in shipping rates, the group has embarked upon a bold strategic plan to refocus the business on container shipping and improve profitability.
First, management has decided to separate out the energy business through a sale or public listing. A complete sale could raise $12 billion, which would cover both the recent purchase of the container shipping group Hamburg Sud as well as enable $6 billion or so in further acquisitions in the container shipping space. Management is rightly keen to take advantage of the process of consolidation within the industry. The integration of Hamburg Sud, furthermore, could yield roughly $1 billion in cost synergies.
Second, capital expenditure will be more tightly controlled across the company, most notably in the terminal division, where no further expansion is expected. Finally, management aims to increase return on invested capital by 2% over the cycle, through increased terminal utilization, selling more inland services, and cross-selling. After two years of declining freight rates, the outlook for the container market appears to be improving. The recent collapse of Hanjin, which removed 3% of supply from the market, may have marked the turning point. At the same time, scrapping rose to the highest level in 2016, removing a further 3% capacity from the fleet. While deliveries will remain high in 2017, adding some 4% to the world fleet, this should be largely offset by scrapping. The fleet could indeed decline in 2019.
Trading on a trough valuation of 0.8 times EV to invested capital, the shares appear attractively valued considering the depth of the restructuring program and the apparent improvement in the container shipping market.
About the instructor:
Stuart Mitchell is the Managing Partner and CIO of S. W. Mitchell Capital and the Investment Manager of two funds; the S. W. Mitchell European Fund and the SWMC European Fund, as well as a number of managed accounts. Prior to founding SWMC in 2005 Stuart was a Principal, Director and Head of Specialist Equities at JO Hambro Investment Management (JOHIM, now Waverton Investment Management). At JOHIM he set up and managed the Charlemagne Fund, a long/short European fund, and the JOHIM European Fund, a long only European fund. The JOHIM European Fund rose by 133% since inception in December 1998 until March 2005 compared with 8% for the benchmark index and was number 1 rated by Micropal within its sector and three star ranked by S&P.
Upon leaving university in 1987 Stuart joined Morgan Grenfell Asset Management (MGAM) and soon afterwards assumed responsibility for managing the continental European equity assets for MGAM’s British pension fund clients. Stuart was appointed a director of MGAM in 1996. He was then made Head of European Equities and was responsible for $27 billion of equity assets. Whilst at MGAM he managed the Morgan Grenfell European Fund which rose by 123% from January 1990 to June 1996 compared with 85% for the benchmark index and was awarded 1st place by Micropal (5 year awards) in 1996. Stuart was born in Scotland and educated at Fettes College and St. Andrews University where he read Medieval History. He is also a graduate of the Owner/President Management programme from the Harvard Business School. Stuart speaks English and French.
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