Price (28 Oct 13 , S$) 1.07
TP (prev. TP S$) 0.95 (0.95)
3Q13 results preview: Turnaround...for the worse
● Neptune Orient Lines (NOL) will release its 3Q13 results after the market close tomorrow (30 October) and we expect a loss of US$64 mn, compared with last year's pre-ex NPAT of US$41 mn and a corporate-monitored consensus of US$21 mn.
● With closely watched peer Orient Overseas International Limited (OOIL) having released its 3Q13 trading data last Friday that displayed a 10% dive in revenues, we fail to see how NOL will present a better result as rates and volumes feel the pressure of industry-wide overcapacity.
● A positive contribution from the logistics business and cost savings from liner segment re-engineering, lower bunker expense and larger vessel efficiencies should provide some offset, but sell-side earnings estimates are likely to trend lower.
● We have made no change to our estimates, our TP of S$0.95, nor our UNDERPERFORM rating pending tomorrow's results, but highlight that if NOL cannot make a profit in its strongest season, then profitability for the year will likely once again elude it.
Following the leader
NOL has rarely, if ever, produced revenue metrics that have outperformed those of its peer and G6 partner OOIL during the past five years and we do not think that 3Q13 will prove otherwise. Given OOIL's 9% slide in average rates and 1% drop in volumes across its network, we believe that NOL will do at least as badly. We anticipate an 11% slide in liner revenues, offset by some gains in the logistics business as Intra-Asian and Asia-EU rates crumble by 10-15% YoY, with volumes down on both of its main deep-sea trades to Europe and on the Transpacific.
The main area where we could be wrong is expense reduction where we anticipate a 4% reduction in unit costs, down from 2Q13's 9% YoY reduction. Unit costs have been falling at 4%+ since 3Q12, so we feel that the ability to sustain 2Q13's acceleration is limited…especially with a bunker price that has only fallen 2% (vs. 10% in 2Q13).
If we are correct, this will be the 10th of the past 11 quarters in which NOL will have reported a pre-exceptional loss. With 4Q volumes and rates typically weaker than the seasonally strong 3Q, we see little probability of the carrier breaking its losing streak this year, absent an improbable 100% GRI success rate on both the A-EU and T/Pac lanes and these holding for the balance of the year. Instead we highlight the potential pressures on prospective estimates that another year of around 3% excess supply delivery over demand growth is likely to have. Prepare for disappointment.
Publish date: 30/10/13