Drewry Maritime Research is taking a negative view of the outlook for publicly traded Korean container shipping lines.
It said in a research note that the losses incurred by Hyundai Merchant Marine and Hanjin Shipping have led to severe deterioration in their financial health. It finds their share prices expensive and financial health poor because they have failed to generate enough cash flow to suffice their operational needs and instead relied heavily on short term debt capital from the local markets.
“Korean container shipping companies have their backs against the wall with mounting debt and piling losses,” said Rahul Kapoor, senior analyst at Drewry Maritime Equity Research.
He said that both Hyundai and Hanjin have severely strained their balance sheets in the current industry downturn and the near term outlook is poor.
“They have seen massive book value erosion between 2009-12, to the tune of 60 percent and will need years of profitability and massive capital increase to tide over what we see as still challenging freight markets. Even as we see the worst is behind them in terms of losses, we are not optimistic of a major turnaround near term and expect the two to continue grappling with weak financial health,” Kapoor said.
It said that Hyundai has an unsustainable debt level and will have to raise capital soon. “The company’s financial health remains under tremendous strain with any further stress will likely put HMM’s ability to meet its maturing debts under stress. We find consensus to be too optimistic and expect HMM to be loss making in fiscal 2013.”
Drewry expects that Hanjin will continue to post losses because of weak fundamentals and high interest costs. It said losses in the past two years have eroded the book value and that the company’s ratio of debt to equity has increased up to over 6:1 as of the second quarter of this year.
“Our estimates suggest Hanjin needs 4 trillion Korean won ($3.6 billion) to fund its capital expenditures and debt maturities and with continued losses the company could find financing highly expensive in a challenging environment. We remain negative on the company’s prospect,” it said.