CMA CGM Memo 060120

CMA CGM. Testing The Bear Thesis. Maintain Positive View. Hold € 21s But Don’t Buy More Given The Rally
PUBLISHED: 06 January 2020
PAGES: 333
SUBMARKET: CMA CGM, Hema, Top Reports, Top Reports,


Why Read?

  • Understand the planned Terminal Link Transaction – impact on FCF, EBITDA, liquidity, net debt; key uncertainties and inconsistencies
  • Understand how the benefits of CMA CGM’s $1.2bn cost savings programme are being eroded and whether the savings will eventually show through on a net basis
  • Understand why the IMO 2020 surcharge will likely not adversely impact container shipping volumes across the industry
  • Understand the return on investment from retro-fitting scrubbers and how CMA CGM is reasonably well positioned on this front so as not to be at a competitive cost disadvantage to other major liners under IMO 2020
  • Understand how much EBITDA uplift CMA CGM will experience from the 56 vessels to be retro-fitted with scrubbers by end 2020
  • Understand the working capital impact of IMO 2020
  • Understand vessel valuation uplift following scrubber installation and resulting increase in secured debt capacity against already encumbered vessels
  • Understand our new liquidity projections for CMA CGM and how debt maturities of c. $4.7bn over Q4 19 – 2022 can be addressed without substantial rollover
  • Understand the drag from Shipping revenue per TEU, CEVA and NOL that is holding back CMA CGM’s financial performance and why CMA CGM will start to generate significant FCF from 2021
  • Understand how much EBITDA uplift CMA CGM will experience from new vessels on order with committed financing
  • Understand how our base case forecasts are conservative on: cyclically low IAS 17 EBITDA per TEU continuing; CEVA; and cost savings
  • Understand how to look at valuation in the sector using a variety of valuation frameworks given differences in IFRS 16 capitalization of leases across firms and differences in adjusted net leverage measured under IFRS 16 vs IAS 17
  • Understand the potential for CMA CGM to IPO and / or for Yildirim to sell its 24% stake in CMA CGM and provide a concrete data point on the equity cushion supporting senior unsecured bondholders

What’s New?

  • Analysis of Terminal Link Transaction
  • Analysis of why the $1.2bn 2019 cost savings are not translating yet into materially higher Adj EBITDA 
  • Analysis of IMO 2020 – impact on working capital; vessel valuation; EBITDA uplift from scrubber-fitted vessels; industry volume and market share 
  • Updated liquidity projections

Questions Answered

  • What is the impact of the Terminal Link Transaction on CMA CGM’s liquidity, net debt, FCF, and EBITDA?
  • Is CMA CGM achieving the targeted $1.2bn cost savings in 2019 and why has IAS 17 Adj EBITDA (excluding CEVA) not materially increased in response? Will the cost savings eventually show through?
  • If the container shipping industry passes on 100% of the additional fuel cost under IMO 2020 to customers, will industry volume decline?
  • Will IMO 2020 trigger market share shifts amongst the major liners as those with a greater proportion of their fleet fitted with scrubbers have a cost advantage and how is each liner positioned in terms of scrubbers ordered?
  • What is the EBITDA impact and ROI of fitting a scrubber to CMA CGM’s average vessel and what EBITDA uplift will the 56 scrubber-fitted vessels CMA CGM will have by end 2020 provide?
  • How much extra secured debt capacity against already encumbered vessels will CMA CGM have from from the vessel valuation increase following scrubber installation on 56 of its vessels?
  • Given the announced Terminal Link Transaction and liquidity plan, how much liquidity will CMA CGM have over Q4 19 – 2023?
  • Will Yildirim sell its 24% stake in CMA CGM, for what price and will there be an IPO?
  • How big is the equity cushion protection senior unsecured bondholders? IFRS 16 EV / EBITDA peer multiples; IAS 17 lease-adjusted EV / EBITDAR peer multiples; transactions (including CMA CGM’s own acquisitions and investments by Yildirim and Bpi France into CMA CGM); Everest DCF 
  • Will CMA CGM be able to refinance its 2021 senior unsecured bonds?