Neptune Orient Lines
Share Price S$1.07
Target Price S$1.30
2Q13: Results Beat Expectations On Cost Reduction And Fleet Optimisation
2Q13 results beat our expectations due primarily to NOL’s consistent cost reduction efforts and fleet optimisation. A better-than-expected US housing market will be a share price catalyst. Maintain BUY. Target price: S$1.30.
• Neptune Orient Lines (NOL) turned around from a net loss of US$371m in 1H12 to a net profit of US$41m in 1H13 but with a net loss of US$35m in 2Q13, down 71% yoy and is better than our expectation of a loss of US$150m. Revenue was US$2.06b in 2Q13 (-12% yoy) and slid slightly by 6% yoy to US$4.4b in 1H13. The earnings turnaround in 1H13 was mainly due to a US$200m gain from the sale of its office building in 1Q13. Excluding the one-off gain, core EBIT in 1H13 was a loss of US$120m, -45% yoy, thanks to its continuous effort to cut costs.
• Container shipping. The container liner division contributed revenue of US$1.73b (-13% yoy) in 2Q13 and core EBIT was a loss of US$45m mainly due to lower freight rates. Total container volume was down 2% yoy to 705,000 FEU in 2Q13, of which Transpacific (TP) volume declined 3% yoy and Asia-Europe (AE) volume dropped 8% yoy. TP rates were US$3,458/FEU, -5% yoy, while AE rates slumped by 22% yoy to US$2,144/FEU.
• Logistics. Logistics revenue slid slightly to US$354m in 2Q13 while core EBIT improved 11% yoy due to greater operating efficiency and productivity growth.
• Cost-saving initiatives remain the keystone. NOL’s cost-saving Efficiency Leadership Programme (ELP) continues to be the strategic keystone to survive amid a volatile freight market. Initiatives including fleet renewal, organisational restructuring, network optimisation, better terminal productivity and lower empty repositioning costs. The ELP led to around US$240m cost savings in 1H13.
• Fleet renewal creates high efficiency. As at end-1H13, 50% of NOL’s newbuild vessels were delivered. APL took delivery of 19 vessels in 2012, including ten 10,000TEU vessels, and four 14,000TEU, three 9,000TEU and two 8,100 TEU vessels were delivered in 1H13. Two 14,000 TEU vessels and three 9,000 TEU vessels are expected to be delivered to APL in 2H13. These very large containerships (VLCS) will create better efficiency and reduce APL's vessel per slot cost. APL's good yield management enable it to maintain a favourable 90% headhaul utilisation in 1H13 despite more VLCS arrivals
2H13 will see a substantial improvement. We expect NOL's 2H13 earnings to see a substantial improvement due to a big jump in AE rates since 1 July. Rates in 4Q13 will depend highly on carriers' capacity discipline, which we believe is still intact for industry leaders such as Maersk.
• Maintain BUY and target price of S$1.30, based on 1.1x 2014F P/B. We expect NOL's earnings to improve via optimising its AE fleet. A betterthan- expected US housing market would be a share price catalyst.
Publish date: 12/08/13