Credit Research Report – CMA CGM S.A.

CMA CGM S.A. is a French container transportation and shipping company. It is a leading worldwide shipping group, using 502 vessels to serve more than 420 ports in 160 different countries, ranking fourth behind; Maersk, MSC and COSCO. In 2019, CMA’s vessels carried 21.6 million TEUs (twenty-foot equivalent units) while handling more than 0.4 million tons of airfreight and 2.4 million tons of overland freight.

To further strengthen its business, and its offering, CMA CGM undertook several acquisitions in recent years, namely; Singapore-based NOL (Neptune Orient Lines) and its container line APL (American President Lines) and CEVA Logistics; a global logistics and supply chain company in both freight management and contract logistics.

Credit Opinion: SPECULATIVE BUY
Country: FRANCE
Sector: INDUSTRIALS- TRANSPORT

Credit Rating
S&P: B-
Moody’s: Caa1

Positives

• A leading worldwide shipping group, making up 11.1% of the industry market share.
• A stable revenue and free cash flow generation.
• Stability in freight rates amid a turbulent period
• Managed capacity and offset demand declines, as carriers intensified blanked sailings . Despite reaching their scheduled peak in April, alike other carriers, Ocean Alliance announced reductions, this largely due to experiencing an improved number of bookings or having a sufficient back-log. Surcharges imposed to mitigate the impact of IMO 2020 , plummeting oil prices, and the system of alliances and consortia in the shipping industry proved supportive.
• Steady improvements in EBITDA: Owing to the massive cost-cutting plan unveiled in March ’19.
• Management have thus far delivered on their promises, notably to reduce its debt and immediately boost its liquidity. Amidst the uncertainty created by the Covid-19 pandemic, CMA CGM strenghtened its balance sheet by successfully completing its $2.1Bn liquidity plan announced in 2019. Additionally, to bolster their liquidity in this turbulent period CMA CGM secured a €1.05Bn syndicated loan, of which, 70% is guaranteed by the French State.
• Commitment by shareholders to inject or raise capital should the need arise.

Negatives

• Threat of a decline in global consumption, possibly due to a second wave of the pandemic endangering fragile transportation demand.
• Freight rate volatility given weaker demand or an increase in oil prices leading to higher bunker costs, impacting profitability margins.
• Turnaround of CMA CGM’s logistics arm; CEVA Logistics, requiring a sustained improvement in free cash flow generation to positive levels, taking longer than anticipated.

Financial Highlights

Source: CCIM
* LTM figures as at 31.03.2020

Our View

We believe that CMA CGM is well positioned to continue delivering, and live-up to their commitments. We like the fact that the company managed to sail well the heightened uncertainties brought about by IMO 2020, and the unprecedented Covid-19 pandemic. Indeed, management capacity proved crucial in mitigating revenues pitfalls despite a decline in volumes, while EBITDA showed signs of improvement due to lower bunker costs and cost-cutting initiatives.

From an industry perspective, positive signs emerged following capacity adjustments, through the implemented blanked sailings by CMA CGM as well as the industry. The latter kept freight rates stable, which typically are very sensitive to demand, above last year’s levels. Consequent to the drop in oil prices, and thus bunker costs which constitute a high operational expenditure for all shipping players, the spread between freight rates and bunker costs widened, allowing for better profitability margins.

More interesting is the fact that despite blanked sailings reached their scheduled peak in the month of April, alike other alliances that enable slot-sharing and vessel-sharing agreements, Ocean Alliance comprised of: CMA CGM, OOCL, Cosco Shipping, and Evergreen, reduced blanked sailings at the fastest pace. The fact that blanked sailings are now declining and heading towards normalized industry levels, bodes well, portraying higher demand and thus increased vessel capacities.

More specifically to CMA CGM, the company holds benevolent liquidity levels given the successful conclusion of the $2.1Bn liquidity plan along with the €1.05Bn syndicate loan, 70% of which is guaranteed by the French State. The said liquidity levels strengthened CMA CGM’s cash position, thus enabling them to confront uncertainties posed by the unprecedented Covid-19 pandemic and alleviating short-term pressure on the company’s liquidity.

We also view the possiblity of the bond being called if market dynamics permit, as the company will seek to extend its maturity ladder. That said, buying at the current market levels would still result in a benevolent capital appreciation in the short-term.

In conclusion, when considering forward looking industry metrics, we see a clear positive trend which we believe should reflect positively in the upcoming 2Q results, set to be published on 4th September. Furthermore, we believe that the cost savings exercise, the management’s capacity and above all, the current liquidity levels are supportive elements which should aid the company going forward. Thus given the said improvement at both sector level and the idiosyncratic element, we are shifting CMA CGM from a ‘HOLD’ to a ‘SPECULATIVE BUY’.

* Mid-Price and YTM as at 26.08.2020

Appendix

Source: Drewry Shipping Consultants Ltd – Cancelled Sailings Tracker, CCIM

Source: Bloomberg, CCIM

Source: Bloomberg, CCIM

* PGE (Prêt Garanti par l’État): State Guaranteed Loan

Source: CMA CGM 1Q 2020 Results, CCIM

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1 Cancelled sailing or a blanked sailing is a shipment that has been cancelled by the carrier. Cancellations typically involve a vessel skipping one port or the entire string. By reducing supply through blank sailings, shipping corporations manage to compensate for the drop in demand for shipments, this preventing the freight rate from dropping.

2 IMO 2020 is an environmental-related regulation enacted to reduce the environmental impact posed by emissions released from vessels, burning fuel containing a high level of sulphur content.

3 Albeit stressing that there was no need for such aid, Robert Yildirim, now having a 24% shareholding in CMA CGM after pumping $600m into the French group in 2010 and 2011, voiced firm support for the French group, stating that he would “of course” pump more money into the group if required. Moreover, in an interview, Michael Sirat discussed the possibility of a part-sale of CEVA Logistics.