Is the worst over?
Despite the likelihood of outsized losses in 4Q13 following a dramatic fall in spot rates over the past few months, the worst may be over and 2014 could be better. NOL's current share price has incorporated large amounts of risk and downside appears limited.
We maintain our Hold call as well as our target price, still based on 1.1x CY14 P/BV, the mid-point of its trading range since 2012. Losses should widen sequentially in 4Q13 due to a dramatic fall in spot rates but NOL's share price has taken a lot of risk into account and should be supported at the current levels. Our forecasts are tweaked up/down by some housekeeping adjustments.
NOL posted core losses of US$9m in 3Q13, its fourth consecutive quarterly loss and its tenth over the past 11 quarters. Its 3Q13 performance was nonetheless a good one, considering the 20% yoy fall in Asia-Europe (AE) and transpacific (TP) spot rates. NOL‟s 3Q13 rates fell 8.8% but the impact on the bottomline was blunted by 5% lower unit costs, with cost savings of circa US$500m for the full year on top of the US$500m already saved in 2012. Hence, the 3Q13 core net loss was much better than 3Q11‟s US$84m loss despite lower volumes and rates in 3Q13. NOL managed a 3Q12 profit of US$41m amid relatively "good" industry behaviour and less aggressive price competition.
What to expect for 2014
By end-2014, NOL would have completed the vast majority of its vessel charters that were entered into in the pre-GFC days. As a result, we believe the group will largely achieve its desired cost base next year and we expect it to turn a small profit of less than 1% net margin. Despite expectations of better earnings in 2014, its near-term share price upside will likely be capped by the possibility of outsized losses in 4Q13. We recommend investors stay on the sidelines for now.
The G6 alliance‟s biggest ships on order are only 14k teus (ordered by NOL), against the 16k/18k teu ships ordered by the P3 alliance and by CSCL/UASC. The G6 will likely lose further market share in the Asia-Europe trade against lower slot cost competitors in the future unless it proceeds to order the 16k/18k teu newbuildings that it currently does not have.
Publish date: 04/12/13