CMA - how to spend it
All,
Please find our updated model here.
What goes up must come down. But when rates do come down, CMA will likely look very different. The company has ridden the spectacular rise in freight rates over the last 18-months and so far has used the cash flow to retire debt and pay dividends. Our model assumes a few more quarters at elevated rates on continued bottlenecks throughout the global supply system and results in the build-up of a gigantic cash pile, which should put the bonds well beyond any risk metric.
Prodigious cash flow:
- The Shanghai Container index rose from US$854 in Q220 to US$3,768 in Q221. CMA CGM’s average rose from US$1,103 to US$1,754 on volumes 19% higher YoY. We are expecting Free Cash flow of US$13.5bn vs US$5.7bn in 2020. The company will add around 5% capacity in the H2 and we are expecting average rates to be flat up here, not least because the company announced a cap.
How to spend it:
- Port capacity will rise, followed by significant additional capacity in shipping, so rates will fall next year. - Following the pandemic, all the major players will be equally well endowed with nothing to stop them from competing for market dominance - on negative rates if need be
- for a long time to come if they so chose. How these players avoid such a scenario will be interesting to observe. It will likely involve the deployment of their war chests in other areas and settling for leaving only proportionately sized cash balances in their shipping operations.
- The largest near-term risk, therefore, is either a huge dividend or a highly dilutive acquisition - most probably in the logistics or another adjacent area.
- CMA CGM has always been an ambitious company and it has never been afraid of debt or new directions. Between 2021 and 2022, we are expecting free cash flow of US$18bn. The company will not sit still with this level of cash.- At the very least we expect CMA to address its organically grown legal and financing structure, so as to optimise its taxes and borrowing capacity for the future.
New Capacity is coming:
- Shipyards have their order books filled. Over the next 2-years fleet capacity will rise by around 12%. Assuming volumes continue to grow at 3% the additional capacity will not lead to a collapse in rates. The industry will eventually over-order, it always does, but the impact in the near term is manageable and will not impact rates in the next 4 quarters.
Positioning:
- We are not re-entering or shorting CMA. The bonds have been a good trade last year, but since the pandemic wreaked havoc on the global supply system, the company has been extremely profitable and will likely continue to be so for another year. We, therefore, see no catalyst at all strong enough to warrant a short and for a long position the bonds trade too tight for us. The company will likely seek to refinance the bonds at the earliest convenience and dramatically drop its cost of capital.
- The most negative catalysts that could occur over the next year are a giant dividend or an extremely dilutive acquisition. If it’s a dividend, however, bondholders can rest assured the family has the wherewithal to come to their rescue (should that be required for any reason) and if it’s a dilutive acquisition, there will still be cash left afterwards, because the company keeps earning.
Happy to discuss,
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055