Shares of A.P. Moller-Maersk took a hit on Thursday as the shipping giant suspended its share buyback program. The company expressed concerns about the ongoing uncertainty in the Red Sea, which could further worsen the slump in the global shipping market and potentially lead to a loss in the full-year 2024.
To navigate these challenges, the Danish shipping giant has devised cost-cutting measures to preserve cash. The disruption in the Red Sea resulting from attacks on cargo ships in the Gulf of Aden since November has prompted Maersk to forgo its $1.6 billion share buyback initiative.
Moreover, the company is reducing its dividend payments by 88%.
Although these attacks, including two on Maersk’s own ships, initially boosted shipping rates in 2023, the lingering uncertainty poses a significant risk to their business in 2024. This risk is amplified by the broader market downturn that has persisted over a longer period.
Reflecting these concerns, Maersk’s shares (MAERSK.B) tumbled 14% on Thursday, contributing to a cumulative decline of 29% over the past year.
Amidst this unpredictable landscape, Maersk acknowledges the challenge of determining the exact impact of the Red Sea disruption on their business. The turmoil has the potential to persist throughout the entirety of 2024.
Maersk Faces Profit Challenges Amid Shipping Disruptions
Maersk, the Copenhagen-based shipping company, has expressed concerns over the uncertainty surrounding the duration and intensity of the disruption in the Red Sea. The company predicts that this disruption could last anywhere from one quarter to a full year. This uncertainty, coupled with the significant oversupply challenges caused by an influx of cargo ships following the end of COVID-19, is expected to impact Maersk’s profits in 2024.
Analysts at JPMorgan, led by Samuel Bland, further anticipate that the current glut in the shipping market will have a lasting effect on Maersk’s profitability. They foresee that the overcapacity issue will persist into 2025.
In terms of financial outlook, Maersk forecasts a loss before interest and tax ranging from $5 billion to breakeven, after achieving $3.9 billion before interest and tax in the previous year.
During the fourth quarter of 2023, Maersk witnessed a sharp decline in revenue from its shipping segment, which constitutes over half of its total sales. The drop amounted to 46%, closing at $7.18 billion. The decrease in freight shipping rates offset a slight increase in volumes fueled by heightened consumer demand.
Similarly, sales from Maersk’s logistics and services business experienced an 8% decline, reaching $3.54 billion. This decline can be attributed to lower rates in the air and haulage divisions. However, the terminals business of the Danish company saw a 2% increase in revenues, reaching $1.02 billion due to higher shipping volumes.
Despite these challenges, Maersk remains committed to navigating the complexities of the shipping industry while striving for improved profitability.