Berenberg Capital has upgraded shares in container giant Hapag-Lloyd despite headwinds facing the sector, including disruption from IMO 2020 rules.
Analysts led by Joel Spungin raised Hapag to buy and adjusted their target price from €34 to €31 per share.
“We believe Hapag’s valuation discount to the sector has grown too wide and that the risk-reward is once again attractive,” Spungin and his colleagues wrote.
“On our estimates, Hapag’s valuation now reflects something close to a recession scenario.”
While Berenberg had bumped up its rating on Hapag, it retains a hild rating on Maersk Line.
A spin-off of Maersk Drilling and a dividend of Total shares were seen as positive developments.
However, Spungin stressed a belief consensus earnings expectations for 2019 and 2020 are unrealistic and need to come down, creating a headwind to share price outperformance.
Spungin said container lines would find IMO 2020 rules disruptive and may struggle to pass higher fuel costs on to customers.
“While that is not impossible, we still believe it will not be straightforward,” he said.
“Customers fear that IMO 2020 is being used as cover for freight-rate increases and are likely to scrutinise new fuel adjustment mechanisms carefully.
"We therefore still believe that some of the fuel price increase will be pushed back onto the shipping lines, at least temporarily.”
Outside of IMO 2020, Berenberg describes the outlook for IMO 2020 as moderately positive.
“Much this year will hinge on the rate of scrapping, which was abnormally low in 2018,” Spungin said.
