Better than expected
NOL’s 1H13 core net loss of US$162m came in at 37% of our full-year loss forecast of US$427m,as we had underestimated the fruits of NOL’s cost-saving initiatives. Although2Q13 rates fell 11.5% yoy, the8.9% yoy fall in unit costs significantly cushioned the impact.
We maintain Underperform on NOL, but raise our target price (still based on 1.1x CY13 P/BV, average since 2011) and FY13-15 EPS forecasts back to roughly the levels prior to our 26 July cut. We lowered unit costs in our model, but this was partly offset by reduced rate assumptions. Continued pressure on spot rates despite industry efforts to raise them could de-rate the stock.
The liner division’s core EBIT loss of US$45m in 2Q13 was much better than 1Q13’s US$101m loss. This was achieved despite a 2.6% qoq drop in average rates, as unit costs dropped by an even faster 6% qoq. At the halfway mark, NOL achieved US$240m in cost savings, and more savings in 2H13 should bring the 2013 total close to last year’s US$500m savings. 60% of the savings came from fleet renewal and “network optimisati on”, as 34 new ships (from 1 Jan 12– 30 Jun 13) replaced 25 returned charters and 13 sold/scrapped vessels. This led to a 16% yoy drop in bunker consumption and a fall in charter-hire costs.
Poor top line
Even so, the top line was weak; 2Q13 volumes carried fell 2.1% yoy (1Q13: -2.4%) while 2Q13 average rates dropped 11.5% yoy (1Q13: -1.8%). Asia-Europe (AE) rates and volumes came under the greatest downward pressure, and intra-Asia rates were dragged down as well. Note that the 2Q13 liner EBIT loss of US$45m compares unfavourably with the US$7m profit in 2Q12. The logistics arm did better, with 1H13 core EBIT up 18% yoy.
NOL said the recent Jul/Aug AE rate hikes are largely sticking, but it had difficulties doing the same for the Middle East, and the transpacific hikes were lower than expected. More hikes are planned in Sep, but coming at the tail end of a likely uneventful peak season, we expect little success and rate erosion to quickly follow.
Publish date: 12/08/13