Fair value S$0.95
add: 12m dividend forecast S$0.00
versus: Current price S$1.13
NO PEAK SEASON SURPRISE
• Freight rates still weak
• An uninspired 2H ahead
• Maintain SELL on the lack of catalysts
Rate hikes fail to sustain
Despite industry wide efforts to push through general rate hikes, freight rates according to the Shanghai Containerised Freight Index show continued softening in Sep instead. Rates on the Asia-Europe and Latin-America trade routes exhibited considerable declines of almost 30% and more than 60%, respectively, so far this year while the rates for the Transpacific trade route has also started to ease. The lone bright spot remains the Intra-Asia route, which has seen freights marginally higher than at the start of the year. This development reaffirms our earlier assertion that 3Q13 is unlikely to yield any positive surprise for Neptune Orient Lines (NOL).
Expect a weak 2H13
With the traditional 3Q peak season weaker than expected and drawing to a close, we are likely to see freight rates subsequently head lower in 4Q13 as demand typically drops off, further affecting the ability of liners to force through rate hikes for the remainder of the year. On an industry level, substantial collective action is still lacking, and with pre-crisis ordered vessels coming on board and the addition of larger ships, overcapacity remains a key issue facing liners. That said, we are forecasting a much smaller core operating profit for NOL in 3Q13 and another loss-making 4Q13 to end a disappointing 2013.
Possibility of a turnaround in 2014?
Some are expecting a turnaround as early as 2014, but there have been recent reports on new ship orders being placed, which could potentially push out the overcapacity problem and delay any turnaround beyond the 2015 consensus.
In light of the weaker outlook for 2H13 and beyond, we maintain our SELL on NOL with an unchanged fair value of S$0.95. The lack of any near-term catalyst compels us to keep our P/B peg at 0.9x.
Publish date: 25/09/13