Tuesday, July 9, 2013

Neptune Orient Lines : Near-Term Earnings Weakness (MKE)

Neptune Orient Lines
Hold (from Buy)
Share price: SGD1.06
Target price: SGD1.25 (from SGD1.63)
Near-Term Earnings Weakness

Assume coverage with HOLD, TP: SGD1.25. Following a change of analyst, we assume coverage of NOL with a TP of SGD1.25 based on 1.1X FY13-14E BVPS (long-term average: 1.2X). Fundamentally, we believe that the container shipping industry is near its cyclical trough and expect better times ahead as the supply overhang improves over the next few years. However, we remain cautious in our recommendation as the prospect of a third consecutive year of losses (on our estimates) will likely weigh on sentiment towards the stock. Furthermore, we believe consensus expectations of a profitable FY13 will be missed.


Consensus remains too bullish. After adjusting for the one-off gain on the disposal of a building, we forecast a third consecutive year of losses in FY13, to the tune of USD182m. We believe that consensus numbers may not have fully reflected the weak rate environment this year and expect earnings downgrades to trickle through. We expect losses to widen sequentially in 2Q13E, to approximately USD160m.

Container shipping industry currently at the trough, in our view. Freight rates continue to be under pressure as industry oversupply is exacerbated by ongoing vessel deliveries. On the plus side however, a high rate of vessel demolitions recently has led BIMCO, a shipping association, to revise its full-year fleet growth estimates to +6.1% from +7.4%.

Better times ahead, but still too early to get in. We expect industry oversupply to ease from FY14E onwards as vessel deliveries slow. Compared to a pre-crisis high of 58%, vessels on order have moderated to only 19% of existing fleet in the industry. As vessel oversupply is the primary cause of pain in the industry, a moderation in future supply growth would be the best gauge of better industry prospects, in our view. With the ongoing delivery of new vessels, we expect NOL to return the majority of charters expiring over the next two years. This would bring its net fleet growth to 2% and 5% YoY in FY13E and FY14E respectively, and lower the percentage of fleet chartered to 31% (Dec 2012: 59% chartered).

Freight rate environment remains weak. Industry freight rates have been sliding throughout the year, with spot rates declining by as much as 18% from the start of the year. Following the successful implementation of a rate increase recently, spot rates have rallied 22% off the bottom. Sharp rate increases are usually a positive stock price driver for the sector but we do not expect such a reaction this time around, as the current rate rise has been well anticipated by the market. Moreover, liners could still be struggling for profits at current rate levels. In contrast to consensus expectations of a profitable FY13, we are forecasting a third consecutive year of losses due to sustained weakness in freight rates. As illustrated by the divergence in rates and consensus EPS trends, we believe that consensus earnings have yet to fully reflect the weak rate environment for this year.

Vessels on order eased to 19% of fleet. We expect industry oversupply to ease off from FY14E onwards as vessel deliveries slow. Compared to a pre-crisis high of 58%, vessels on order have moderated to only 19% of existing fleet in the industry. Vessel oversupply is the primary cause of pain in the industry, so a moderation in future supply growth would be the best gauge of better industry prospects, in our view. With the ongoing delivery of new vessels, we expect NOL to return a majority of its expiring charters over the next two years. This would bring its FY13E and FY14E net fleet growth to 2% and 5% YoY respectively, and lower the percentage of fleet chartered to 31% (Dec 2012: 59% chartered).

Valuation. After adjusting for the one-off gain on the disposal of a building, we forecast an average ROE of only 1.8% over FY13-14E. By comparing our forecast ROE with historical valuations, we set our target price at SGD1.25 (1.1X P/B). With the changing charter-to-owned profile of NOL’s fleet, we adjust its historical Enterprise Value (EV adj.) to include its committed leases, which would make historical valuations more comparable. On an EV adj. to EBITDAR basis, NOL’s current
valuation remains above its historical average of 5.4X. Its P/B valuation also exceeds that of its peers.



Source/Extract/Excerpts/来源/转贴/摘录: MKE-Research,
Publish date: 08/07/13

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