risks Most are discounted Equity Research Investment Research Post-results note 6 November 2015 A. P. Moller – Maersk Buy (Unchanged) Industrial Transportation & Motorways, Most risks are discounted Denmark We maintain our view that most risks are discounted in the share price; Key data however, we need a sentiment change to trigger a revaluation, which we Price (DKK) * 10,510 Target price, 12 mth (DKK) † 12,500 believe would be a return of growth in the container market. The valuation is appealing and we reiterate our Buy recommendation. Market cap (USDm) 32,621 Market cap (EURm) 30,028 Impact on the investment case. The report does not change our view. We still Reuters MAERSKb.CO expect container lines to adjust capacity to match demand short term to bring Bloomberg MAERSKB DC rates above breakeven levels or further ahead of contract negotiations around No. of shares (m) 21.3 year-end. We expect rates to start to deteriorate from tomorrow after last week’s Net debt (current Y/E) (m) 11,099 Free float 47.0% successful GRI before a new push in mid-December and ahead of the Chinese Avg. daily vol, 12M (000) 28.8 New Year (8 February 2016) demand rush. However, we need to see evidence Price performance that demand has resumed a normal relation to GDP growth (about 1.5x) before 17,000 16,000 we find sustainable support for the share price – we would not expect to see this 15,000 14,000 evidence before Q2 16. 13,000 12,000 11,000 10,000 Estimate changes. We have only made minor changes to our estimates following entry not defined. Error! AutoText 9,000 Nov 14 Feb 15 May 15 Aug 15 Nov 15 the report, leading to 4% lower EPS in 2015 and 3% higher EPS in 2016. MAERSKb.CO FTSE EU 300/Ind. Trans. rebased Maersk Line. We expect Maersk Line NOPAT to increase to USD1.98bn in 2016 1M 3M 12M 5Y based on growth resuming to 3-5%, a 2.5% structural reduction in rates and a unit Absolute -3% -14% -30% -19% cost reduction of -4.8%, with bunker costs falling by 21% due to lower bunker Rel. local market -6% -9% -44% -60% Rel. EU Sector -5% -9% -35% -44% prices and other unit costs falling by 2%. Source: FactSet Valuation. We base our 12-month price target of DKK12,500 on a blend of our Estimate changes 15E 16E 17E P/CE multiple peer group valuation model and absolute valuation of P/BV 0.7x in Sales 0.3% 0.9% 0.9% 2016, which is the lowest since 2008, when it was 0.8x. EBITDA 0.9% 5.2% 4.9% EBIT (adj.) -3.7% 6.3% 7.0% EPS (adj.) -4.3% 3.1% 3.1% Key financials Source: Danske Bank Markets estimates Year-end Dec (USD) 2013 2014 2015E 2016E 2017E Revenues (m) 47,654 47,770 41,655 42,986 44,484 Next event Q4 25-Feb Revenues growth -19.9% 0.2% -12.8% 3.2% 3.5% EBITDA (m) 11,598 14,169 9,919 10,476 10,959 * Price as at close on 6 November 2015 EBIT, adj. (m) 6,912 9,054 4,791 5,498 5,772 † Includes dividends EBIT growth -9.6% 31.0% -47.1% 14.7% 5.0% Pre-tax profit (m) 6,623 5,311 5,027 5,399 5,753 EPS (adj.) 140 263 152 180 200 DPS 9.97 53.4 53.7 59.7 62.7 Dividend yield 0.5% 2.6% 3.5% 3.9% 4.1% FCF yield 5.6% 0.0% -0.5% 3.7% 3.6% EBIT margin (adj.) 14.5% 19.0% 11.5% 12.8% 13.0% Net debt/EBITDA (x) 1.1 0.6 1.1 1.2 1.2 ROIC 9.1% 14.7% 10.1% 10.7% 10.6% EV/sales (x) 1.2 1.1 1.0 1.0 1.0 EV/EBITDA (x) 4.9 3.9 4.6 4.1 3.9 EV/EBIT (adj.) (x) 8.2 5.8 9.0 7.8 7.5 Analyst(s) P/E (adj.) (x) 15.6 7.7 10.1 8.5 7.7 P/BV (x) 1.2 1.1 0.7 0.7 0.7 Finn Bjarke Petersen +45 45 12 80 36 Source: Company data, Danske Bank Markets estimates [email protected] 1Important | A. P. Moller disclosures – Maersk and certificationsBuy are contained from page 17 of this report. www.danskemarketsequities.com risks Most are discounted Investment case Maersk is a conglomerate, with Maersk Line the swing factor for earnings. We expect Maersk Line to continue outperforming peers through cost leadership – the balance in the container market should improve significantly in 2016 through falling supply growth and continued strong performance by European and US consumers. The group has a neutral/positive correlation with falling oil prices due to a short oil position in US dollar terms. Maersk Oil production has reached a trough and looks set to improve in the next five years. However, the risk of losing the Qatar oil contract is a real concern but, in our view, would not be a blow to the group's performance. Maersk Drilling has strong contract coverage that shelters it from falling rates for rigs. Disciplined capex and focus on ROIC will leave room for a significant share buyback in the coming years. In addition, in our view valuation is attractive in absolute and historical terms. Change of estimates Our estimates for Maersk Group are relatively unchanged following the Q3 15 report. For details of the changes to our divisional estimates, see the relevant text below. Table 1. Changes to estimates USDm New Change Change (%) 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E Maersk Line 24,361 24,688 25,418 326 213 219 1% 1% 1% Maersk Oil 5,554 5,669 6,004 -173 196 208 -3% 4% 4% APM Terminals 4,168 4,413 4,717 -47 -50 -53 -1% -1% -1% entry not defined. Error! AutoText Maersk Drilling 2,497 2,423 2,319 -50 -17 -16 -2% -1% -1% Maersk Supply Services 700 729 761 0 0 0 0% 0% 0% Maersk Tankers 1,114 1,216 1,139 51 52 52 5% 5% 5% Damco 3,409 3,716 3,902 0 0 0 0% 0% 0% Svitzer 650 933 1,023 0 0 0 0% 0% 0% Other -800 -800 -800 0 0 0 0% 0% 0% Revenue 41,655 42,986 44,484 106 395 411 0% 1% 1% Maersk Line 1,578 1,980 2,110 -8 62 63 -1% 3% 3% Maersk Oil 388 320 320 -127 -9 11 -25% -3% 4% APM Terminals 730 899 1,057 65 56 68 10% 7% 7% Maersk Drilling 699 527 458 -52 -16 -15 -7% -3% -3% Maersk Supply Services 178 158 174 0 0 0 0% 0% 0% Maersk Tankers 212 239 229 37 30 30 21% 14% 15% Damco 54 71 91 14 18 3 36% 33% 3% Svitzer 119 202 213 0 2 2 0% 1% 1% Other -194 -487 -466 -71 -22 -24 -58% -5% -6% Result for year 3,765 3,909 4,187 -142 121 138 -4% 3% 3% Discontinued businesses 0 0 0 0 0% 0% 0% Impairment losses 100 0 0 0 0 0 0% 0% Gain/loss on sale, net 465 0 0 0 0 0 0% 0% 0% Other one-offs Result for year adj. 3,400 3,909 4,187 -142 121 138 -4% 3% 3% Minorities 180 180 180 0 0 0 0% 0% 0% Net result adjusted 3,220 3,729 4,007 -142 121 138 -4% 3% 4% Source: Danske Bank Markets estimates Realised vs estimates Group guidance for underlying profit is around USD3.4bn as in the 23 October profit warning. However, the company reduced its capex guidance from USD8bn to USD7bn. Group net profit for continued businesses excluding gains and impairments for Q3 15 came in at USD660m versus the USD662m guided on 23 October. 2 | A. P. Moller – Maersk Buy www.danskemarketsequities.com risks Most are discounted Maersk Line reported NOPAT of USD264m versus our estimate of USD353m (no consensus after 23 October). Maersk Oil reported NOPAT of USD32m versus company-collected consensus of USD49m (our estimate USD93m), the result included USD82m in exploration costs versus consensus of USD180m (our estimate USD200m). We estimate full-year production of 300,000boepd (previously 285,000boepd). APM Terminals’ reported NOPAT was USD175m versus consensus of USD171m (our estimate USD143m), while like-for-like volumes were down -4.4% versus -3.5% in Q2 15. Maersk Drilling reported NOPAT of USD184m versus consensus of USD175m (our estimate USD215m). T able 2. Realised vs expected USDm Danske Cons. Q3 14 2014 Q3 15 Q3 15A Q3 15E Dev.% Q3 15E Dev.% Maersk Line 7,074 27,351 6,018 6,018 5,933 1.4% 6,165 -2.4% Maersk Oil 2,174 8,737 1,321 1,321 1,484 -11.0% 1,388 -4.8% APM Terminals 1,109 4,455 1,046 1,046 1,038 0.8% 1,054 -0.8% Maersk Drilling 525 2,102 646 646 674 -4.2% 617 4.7% Maersk Supply Services 232 778 145 145 186 -21.9% 196 -26.0% Maersk Tankers 267 1,174 282 282 275 2.5% 267 5.8% Damco 848 3,164 719 719 655 9.8% 767 -6.2% Svitzer 189 821 161 161 144 12.2% 170 -5.3% Other -249 -812 -210 -228 -210 -234 Revenue 12,169 47,770 10,128 10,110 10,178 -0.7% 10,407 -2.9% Error! AutoText entry not defined.