Neptune Orient Lines –
Fair value S$0.95
add: 12m dividend forecast S$0.000
versus: Current price S$1.07
Lacklustre 2H ahead
• 2Q13 results weaker than expected
• Peak season unlikely to spur improvement
• Outlook to remain weak for medium term
With a disappointing set of 2Q13 results, we downgrade Neptune Orient Lines’s (NOL) to SELL. Despite the onset of the 3Q13 peak season, freight rates according to the Shanghai Containerised
Freight Index remain weak across the board and traditional rate hikes have yet to make up ground lost in 2Q13. In addition, volume demand should remain weak given the tepid market conditions, and supply overhang continues to render industry action moot. With this downward outlook likely to extend into the medium term, we lower our FY13/14 forecasts accordingly and reduce our P/B peg to 0.9x from 1.1x previously. As a result, our fair value estimate falls to S$0.95 (S$1.38 previously).
2Q13 results disappoint
Neptune Orient Lines's (NOL) 2Q13 results disappointed us as weaker-than-expected market conditions caused drastic declines in freight rates on the transpacific and Asia-Europe routes, exacerbating already tepid volume demand. 2Q13 revenue fell 11.5% YoY to US$2.1b and the group registered a core operating loss of US$41m. On a half-year basis, revenue declined 5.9% YoY to S$4.4b while core operating losses came in at US$127m (vs. -US$212m for 1H12). Only with a US$200m gain from the sale of its headquarters in 1Q13 was the group able to register a net profit of US$41m for 1H13 (vs. -US$371m for 1H12).
Peak season unlikely to yield positive surprise
According to the Shanghai Containerised Freight Index, current freight rates for 3Q13 remain weak across the board. This development does not bode well for NOL, especially with the onset of the peak season. Management has also indicated that general rate hikes so far have yet to close the gap created in 2Q13. In addition, given the weak market conditions and overhang of excess capacity, any further rate increases are unlikely to have a meaningful impact.
Medium term outlook worrisome
With the gap between demand and fleet capacity only expected to start narrowing in FY15, the medium-term outlook for NOL remains worrisome. While downside mitigation lies in the form of disciplined collective industry action, a sustained change in growth demand patterns could render efforts, like the recent P3 alliance, moot.
Downgrade to SELL
In light of the weaker outlook for 2H13 and beyond, we lower our FY13/14 forecasts accordingly and lower our P/B peg to 0.9x (1.1x previously). Our fair value estimate falls to S$0.95 (S$1.17 previous) and we downgrade NOL to SELL.
Publish date: 07/08/13