logistics

1Q2023 the effects of the slowdown and the high base of the previous year  Decrease in revenues and lower margin in TIM SA, net profit lower by over 50% y/y - as expected. Weaker results of 3LP (costs of launching new facilities), decline in EBITDA and negative net result - in line with our forecasts. Weaker operating CF (renewed increase in working capital: PLN +35 million q/q) and higher CAPEX - as a consequence, an increase in DN by over PLN 30 million. TIM's results are of secondary importance in the situation of the ongoing tender offer for 100% of the company's sharesat the price of PLN 50.69 per share.     Companies' results Sales of TIM SA in the first quarter of 2023 decreased by 8%, reflecting the deterioration of the market situation. In addition, the margin on goods fell (-1 pp y/y and similarly q/q), which the management explains by the intensification of competition and a change in the attitude of buyers (they no longer buy "in stock"). At the same time, operating costs increased (+10% y/y), mainly in external services (transport, warehouses +13% y/y). The balance of other activities and the balance of "financials" were not significant for the final result in TIM SA.    Unfortunately, the results of the logistics company 3LP fell short of our expectations. This entity showed a 2% decrease in sales to customers from outside the Group (to approx. PLN 16.5 million), generating a loss already at the EBIT level (PLN -0.7 million, for the first time in at least 2 years).   The EBITDA result was the lowest since Q1 2020 (below PLN 5 million). The negative impact of the "financials" was partly offset by positive exchange differences (balance of financial activities in Q1 approx. PLN -2 million). The net loss in the first quarter amounted to almost PLN 3 million. In the following quarters, the results should improve, as 3LP will use the newly launched warehouse space more and more effectively, however, the weaker results of TIM SA will be weighed down (decrease in the volume of orders). Throughout 2023, we expect an increase in EBITDA with lower EBIT and a slightly negative net result.     Renewed increase in inventories and receivables offset by slightly higher trade payables In Q1 2023, TIM SA increased the level of inventories by PLN 17 million and receivables by PLN 18.5 million. On the other hand, trade liabilities increased by approx. PLN 6 million, financing the increase in current assets only to a small extent. As a result, the net working capital (KON) increased by approx. PLN 30 million, and the cash turnover cycle increased to almost 50 days (parent data).     The quarterly value of the consolidated operating CF (PLN -10 million) was the lowest since mid-2015, mainly due to the decrease in EBITDA and the outflow of funds to working capital. Debt increased (+PLN 17 million q/q, the effect of launching new warehouses and showing long-term leases), with a clearly lower level of cash - the result is an increase in net debt (+PLN 32.5 million q/q). The increases relate mainly to 3LP, in TIM SA alone there is still net cash (PLN 12 million, but PLN 15 million less than in the previous quarter). The DN/EBITDA ratio in the Capital Group increased to 0.9x, but remains at a very safe level. The decline in earnings was expected by us (as a result of the downturn in the industry). We are negatively surprised by thepoor 3LP data, although we hope for an improvement in the coming quarters. We maintain our full-year forecasts. On the other hand, we are aware that until the ongoing calls are resolved (beginning of July 2023), the exchange rate will react poorly to information not related to the call itself. We assume that the tender offer will be successful (the proposed conditions are attractive for TIM SA shareholders), which will result in the delisting of the company's shares from stock exchange trading

Oponeo’s business model is proving its worth. The company is continuing to increase its market share, as was clearly evident in the 2Q23 results: despite the Polish market contracting by 13% y/y, Oponeo’s sales volume grew by 19.5% y/y. Admittedly, the company paid for it with a slightly lower gross sales margin (with good control of overheads), but in our opinion, it is on the right path.   Oponeo still has growth potential, given that offline sales in Poland exceed 50%. The size of the aftersales tyre market in Poland per capita is over 2x smaller than in Germany. In our view, the future trading model certainly has room for large specialised online sellers (in addition to broad marketplaces), which should continue to grow at the expense of offline sales and small players. As a market leader, Oponeo is driving its competitive edge by investing in automation and logistics. Growing dividends and ongoing share buybacks are a confirmation of sound corporate governance. The valuation seems attractive enough to more than offset the risks associated with high business volatility (weather, consumer sentiment, high working capital).             VALUATION Our valuation is based on the DCF model. We have additionally presented a peer valuation, taking into consideration pharmaceutical distribution companies. The DCF model consists of two phases. In the first phase (2022F-2026F), we have forecast in detail all the key parameters required for the company valuation, including, in particular, the value of revenue, capital expenditure, cost level, and balance sheet items. The second phase starts after 2027F. In it, we have assumed a constant free cash flow growth rate at the level of 2.5% per year.   We have used a WACC-based discount rate. The risk-free rate is assumed at 5.5%, which reflects the 10-year treasury bond yield. Beta is assumed at 0.9x (due to the strong balance sheet). We have adopted an equity risk premium of 5.5%. We have discounted all free cash flows for the company as at 31 December 2023 and deducted the forecast net debt (added net cash).        

End of Europe’s exemption for ship alliances adds to tough market conditions Europe's planned termination of the so-called 'block exemption rule' that enables container liners to closely cooperate within alliances will limit room to manoeuvre. This particularly applies to the container liners outside of the largest players, and adds to already challenging market conditions.   Europe plans to end the anti-trust exemption for container alliances The European Commission has announced it will not extend the block exemption for container liners which expires 25 April 2024. This exemption enabled container shipping companies with a combined market share of up to 30% to provide joint services to clients, and resulted in the formation of three large alliances, 2M (Maersk, MSC), The Alliance (Hapag-Lloyd, HMM, Ocean Network Express and Yang Ming) and The Ocean Alliance (CMA CGM, Cosco, OOCL, Evergreen), as companies sought to manage capacity and share their networks. The exemption in the cyclical container liner market was first introduced during the global financial crisis in 2009 and extended in 2014 and again in 2022. In the early stage of the pandemic - when container liners suffered unprecedented uncertainty - the regulation was again extended. But with consumers stuck at home shifting their spending to goods, and ports and supply chains across the world congested due to closures and events such as the blockage of the Suez Canal, freight rates skyrocketed, and profits reached record highs in 2021 and 2022. This sparked criticism around the rationale for the exemption among shippers and policymakers.   The golden age in container shipping has ended - but the market structure has also changed Container rates have collapsed since early 2022 and spot rates on Asia to Europe trade have dropped below pre-pandemic levels. The sector has also faced a combination of faltering demand and a flood of newly ordered vessel capacity coming online. However, the European Commission has acted in light of what it sees as structural market changes. There has been consolidation. And on top of this, several liner companies including Maersk, CMA CGM and MSC have actively taken stakes in port terminals, logistics services providers and even air freight services over the past two years. With this ‘integration,’ these companies have developed a presence across supply chains and an ability to offer end-to-end logistics solutions.    End of the exemption makes offering joint services and capacity management more difficult The expiry of the block exemption means that cooperation in terms of joint services will be restricted and managing capacity (by for instance taking out (‘blanking’) sailings) will be more difficult. For some container liners, it will also be more difficult to offer specific port calls to clients. Profits in container shipping have been on a downward track from elevated levels since the second quarter of 2022. Global container volumes have been falling this year and are expected to grow only slightly this year amid global headwinds for trade. At the same time, the market is set to be flooded by a wave of new vessels coming online (TEU-capacity will be expanded by some 27% in 2023-2025) making the conditions in container shipping more challenging.   Alliances won't (necessarily) cease to exist, but room to manoeuvre will be more limited The EU and US have followed the same approach regarding the exemption, with the ruling also under review in the US. Either way, the EU is already part of large trade routes and the lifting of the exemption will limit the room to cooperate and weigh on market conditions, especially for pure container liners. MSC and Maersk decided earlier to dismantle their cooperation, possibly because market leader MSC has become big enough by itself. The other two alliances won’t necessarily cease to exist, but there will probably be a higher regulatory burden for joint operations under general competition rules.  

Tankers continue to sail, but the number is diminishing as risk of assaults comes at a cost Most tankers are continuing their journeys, but this doesn’t mean the tanker market is not affected by the threat of attacks on vessels. Spot rates, including those for very large crude carriers (VLCC) chartered on this route from the Persian Gulf, are under strain. And in the meantime, insurance market premiums for Red Sea crossings have surged. So different from what some may think, the Red Sea - Suez Canal shipping route isn’t blocked, but it is certainly increasingly affected.   Container rates on most effected Asia-Europe route more than tripled while the global average doubled Container spot rates on one of the largest and most affected global trade routes, Asia-Europe, have tripled compared to early December in the first week of January. This marks the provisional end of downward trending prices after earlier record-breaking levels during the pandemic. Spot rates, including surcharges on the Shanghai-Rotterdam route, reached $ 4,400 on 11 January compared to $1,170 at the start of December for a standardised 40-foot container. Most trade lanes across the world are indirectly affected, and global spot rates have doubled over the same period. Several US east coast-bound vessels from Asia have shifted away from the Panama Canal, which is suffering from a drought, and are now also impacted by the troubles in the Red Sea. This comes on top of already extended sailing times.     Container rates to Europe have risen rapidly since Red Sea troubles started World container index (WCI), freight rates in $ per FEU (40 ft container)   Container rates rebounded quickly and more may follow Container sport rates have gone up rapidly following the capacity disruption and rates may go up even further. But we are still far away from the record-breaking levels of early 2022. Current spot prices still hover below half of this peak for the Shanghai – Rotterdam route. A complicating factor for the market is that the world simultaneously faces another chokepoint –  the Panama Canal – also a vital link for trade, and the coinciding Chinese New Year may lead to extra friction this year. But on the other hand, demand for goods is running far less hot than over the pandemic, and with a range of new-build vessels online and still underway there’s much more capacity available. In addition, port operations are generally also running relatively smoothly.   Red sea crisis in a different category for shipping than the pandemic disruption The current market balance of supply and demand is less strained than when Evergiven blocked the Suez Canal in 2021, which should limit the upside for container rates. Having said that, the impact ultimately depends on how long it takes to resume shipments. Rebalancing takes time as we have seen before. If extreme weather events add to the disarray, elevated freight rates could easily be around for longer. But the current disruption also masks underlying overcapacity following a massive inflow of vessel capacity. When the most pressing Red Sea disruption is resolved we can gradually expect renewed downward pressure.     Mounting surcharges complicate the market The container shipping sector is subject to various surcharges on top of base freight rates and several of them, including the bunker adjustment (BAF) and from this year the Emissions surcharge (EMS) are covered by clauses in contracts. But the list of surcharges has continued to expand in response to several events in the last few years. Port congestion surcharges (PCS) were introduced over the pandemic and amid the current Red Sea crisis, container liners have implemented ‘transit disruption charges’ (TSD). This extra fee, combined with a peak season surcharge ahead of the Chinese New Year (PSS), has pushed up container rates. These fees differ among container liners but have become a dominant factor in pricing. Consequently, container transport pricing has turned increasingly opaque and hard to predict for shippers and logistics services providers.