Neptune Orient Lines
It could have been worse
▊ NOL’s full-year core net loss of US$305m was in line at 99% of our expectation, and could have been much worse if it had not cut US$470m from its costs last year, as it replaced expensive long-term charters with newly delivered ships. The annual loss shrank slightly from the US$362m in 2012, with the yoy drop in average freight rates almost wholly offsetting the cost savings. We fine-tune our forecasts, and introduce our FY16 numbers. Our call remains a Hold, but we reduce the target price slightly as we lower the target multiple from 1.1x CY14 P/BV to 1.05x, still based on the average since 2012.
Highlights of FY13
NOL succeeded in reducing its unit costs by 7% in 2013, as it took delivery of 11 new ships (this excludes three new ships delivered but immediately chartered to MOL), which replaced eight older or smaller ships that were sold or scrapped, and the return of five expensive charter-ins. Unit costs also benefitted from the 8% yoy fall in bunker prices, but would have declined even more had NOL not experienced a 2.5% fall in volumes lifted. This had caused the headhaul utilisation to drop 2% pts yoy to 91% in 2013, as NOL’s average full-year capacity rose yoy by slightly less than 1%. However, the good work on the cost front was mostly consumed by the 7.6% yoy fall in average freight rates, with Asia-Europe, intra-Asia and transpacific rates all weaker compared to 2012.
A profitable 2014 expected
NOL saved US$970m in 2012-13, and we forecast another US$260m in savings this year as NOL will take delivery of eight ships (82,000 teu in total, excluding two 14,000 teu ships to be chartered to MOL) that will replace 20 expensive, fuel-inefficient charters (totalling 119,000 teu). Although global containership supply growth will exceed demand growth in 2014 by around 1% pt or less, the gap is much narrower than the 1.7% pts unfavourable gap in 2013. As such, we think freight rates may still rise marginally this year; we assume a 2% yoy rate improvement for NOL, which will take NOL across to the black in 2014.
More ship orders to come?
With OOIL likely to order 16,000 teu ships, we think that NOL may also do the same for delivery in 2016-17, in order to improve the competitive position of the G6 alliance in the Asia-Europe trade. These are not yet in our model.
Publish date: 21/02/14