Drewry: Hapag-Lloyd IPO a Good Buy

Analysts at Drewry Maritime Equity Research (DMER) have advised investors to subscribe to Hapag-Lloyd’s USD 300 million initial public offering (IPO), saying that the German container line has set an attractive price for its shares, which offsets the current slump in container shipping market and will in time create value for shareholders. 

The timing and merits of the Hapag-Lloyd public offering have been questioned given the challenging environment facing the container shipping sector. The industry stands in the midst of prolonged low freight rates and subdued global demand.

Drewry believes the near-to-medium term outlook for the container shipping industry is marred by oversupply, which will continue to plague the sector in the foreseeable future.

However, Hapag-Lloyd’s well-diversified presence across routes reduces the risk from the slump on a particular trade lane. The company is among the top five liner companies in capacity terms, and its large scale of operations accompanied by synergies from cost saving programs will ensure that it remains profitable despite the challenging business environment, Drewry says.

In terms of valuation, Hapag-Lloyd’s price band of EUR 23–EUR 29 per share translates into a 2016 P/B of 0.52x to 0.66x, compared with the average P/B multiple near 1x for the industry peers. Drewry believes the IPO is competitively priced even after factoring in the lower return on equity and related sector headwinds.

“We recommend investors to subscribe to the Hapag-Lloyd’s IPO given much of the underlying sector disappointment has been discounted in the price,” Rahul Kapoor and Nilesh Tiwary, analysts at DMER, said.

”We see the offering as attractively priced, providing an opportunity to take exposure in one of the largest and financially sound container shipping companies. Even as meaningful upside in the short term and sector recovery on the ground remain elusive, DMER believes the current valuations are likely to provide a floor to the share price and gradually create value for its shareholders.” 

The company at the time of listing would be the cheapest container operator of its size, Drewry says.

Post the merger with CSAV container operations, Hapag-Lloyd presents a compelling combination of scale of operations, is less reliant on the volatile intra-Asia market, and has seasoned management, according to Drewry.

While the company’s offering is at a much larger discount to the industry, Drewry estimates Hapag-Lloyd’s fair value at EUR 32, a 40% upside from the lower band of EUR 23.

Hapag-Lloyd scores an Orange light on DMER’s bespoke risk ranking matrix, indicating medium risk and stable outlook over the long term.

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