Neptune Orient Lines:
Cost efficiency to the rescue
Price Target : 12-month S$ 1.13 (Prev S$ 1.19)
•2Q13 net loss of US$34.6m in line with estimates, after adjusting for one-offs
•Declining volumes and freight rates offset to an extent by cost control measures and lower bunker fuel prices
•Despite encouraging macro data from the US, industry demand supply gap leaves little room to expect any significant or sustainable freight rate increases
•Maintain HOLD with lower TP of S$1.13 (1x P/BV)
Challenging volume and rate environment continues. NOL reported a net loss of US$34.6m in 2Q13, and after adjusting for gains on sale of assets and realized gains on financial hedging instruments, results were largely in line with our expectations of a US$64m net loss in 2Q13. Liner volumes during the quarter were down 2% y-o-y, with contractions on both US and Europe trade lanes, while average freight rate was down 11% y-o-y, resulting in a 13% y-o-y revenue contraction in the liner business. However, effective cost control measures and lower bunker fuel prices meant that operating cost per FEU also dipped 11% y-o-y, thus softening the impact of lower freight rates to an extent. NOL’s efficiency drive has helped to deliver cost savings of about US$240m YTD in FY13, excluding the effect of lower fuel prices.
Rate increases unlikely to be sustainable. Liners have had reasonable success in imposing 2 rounds of rate increases on the Asia-Europe route ahead of the peak season to reach breakeven levels, after rates hit panic levels in June. However, rate increases on the Trans-pacific route have not been so successful, and Intra-Asia rates have also been under pressure from the cascading effect of overcapacity on Asia-Europe. With overall demand growth expected to be tepid at around 4-5% at best, and net supply growth still expected to be around 7% in both FY13/14, we do not expect any rate hikes to stick beyond the high season in 3Q.
Concerns over sustainability of rate hikes will continue to limit re-rating potential of the stock. Hence, we maintain our HOLD call on the stock, with a lower TP of S$1.13, pegged to 1.0x FY14F P/BV. Despite the encouraging data from the US of late, we do not think NOL will be able to achieve normalised returns before FY15, given the adverse demand-supply dynamics in the industry.
Publish date: 12/08/13