Neptune Orient Lines
Rating: Neutral (price target S$1.20)
We expect NOL to continue to suffer from industry-wide overcapacity and low freight rates. We expect the global container shipping industry to remain oversupplied at least until 2015. The expected formation of P3 alliance is also likely to push freight rates structurally lower over time and add pressure to NOL.
While the revenue outlook for NOL remains sluggish, we think any turnaround will only come from cost-savings driven by lower vessel slot costs with the delivery of its larger and more fuel efficient ships. We estimate by the end of 2015, NOL's average vessel size will become comparable with its G6 alliance members and CKYH alliance competitor.
However, it remains 25% below that of the P3 alliance members.
In our upside scenario, we assume a 1% increase in average freight per forty-foot equivalent unit (FEU) resulting in a valuation of S$1.30/share. In our downside scenario, we assume a 1% decrease in average freight per FEU, resulting in a valuation of S$1.10/share.
We think any cyclical recovery and an increase in the freight rate will lift the stock from the current low P/BV level.
We think the recent stock price performance largely reflects the poor Q4 outlook. Our price target is based on target 1.08x P/BV, with a sustainable ROE of 8.0% and COE of 7.7%.