CIMB Research 2015-07-31: Neptune Orient Lines (NOL) - ‘Good’ 1H15, but what about 2H? Maintain HOLD.

‘Good’ 1H15, but what about 2H? 

  • NOL delivered a core net loss of S$7.6m in 2Q15, taking the cumulative 1H loss to S$9m, which was much better than our full-year loss estimate of S$120m. 
  • While freight rates were weaker than forecast, lower unit costs more than made up for the differential, as NOL quietly abandoned its loss-making inland transportation business. 
  • This is the first time we have heard NOL speak on this part of the business, and had not factored in such significant cost savings. 
  • Hence we are halving our loss forecast for FY15 and doubling our FY16 profit forecast. 
  • Still, NOL is unlikely to be profitable in FY15 given tough industry conditions, which is why we keep our Hold call, with target price based on 1 s.d. below the P/BV mean since 2001, i.e. 0.76x (from 0.8x). 
  • TP: S$1.02 (prev S$1.05).

Highlights of 2Q15 

  • NOL reported a net profit of US$890m in 2Q15, but stripping out gains on disposal of APL Logistics of close to US$900m, the core net loss came to S$7.6m, much better than the US$59m loss last year. 
  • Just looking at the average freight rate decline of a staggering 16.7% yoy, we would have thought the losses would have widened, but the reverse happened instead. 

NOL walked away from loss-making business 

  • The key lies in understanding how less-than-optimally NOL had been running its business before this, and the decision that NOL took to aggressively put loss-making cargoes on the chopping board. 
  • NOL’s volumes fell 12% yoy in 2Q, on top of the 15% fall in 1Q, as it reduced its exposure to door-to-door boxes which required inland transportation, for which freight rates never fully compensated for the land-based costs. 
  • As a result, NOL’s unit costs fell 13.7% yoy during the 2Q, against single digit declines seen in prior years, and was also assisted by lower bunker prices, which fell 41% yoy. 
  • This move to a higher proportion of port-to-port cargoes, and a lower exposure to higher-rate door-to-door cargoes, partly explains why NOL’s freight rate drop fell so much. 

Outlook could worsen before it gets better 

  • Skipped sailings for the Jul-Sep period on the AE trade may stabilise the freight rates, but TP rate outlook for the next six months could remain at risk from a weak peak season and as no carrier has announced capacity reductions. 
  • Worse, BCO customers may start asking for contract rate revisions if spot rates do not pick up. 
  • The outlook may improve in 2016, but it is too soon to make this call.

(Raymond YAP, CFA)

Source: http://research.itradecimb.com/