UOB Kay Hian Research 2015-07-20: Neptune Orient Lines - How Much Would NOL Fetch In A Sale? Maintain BUY.

Temasek has reportedly put NOL on sale, and we think this is highly likely as NOL is increasingly seen as non-strategic.
Recent transactions in the shipping/container business range between 4.4x and 10.9x EV/EBITDA, with the transport sector as a whole averaging 11.9x EV/EBITDA.
Based on our calculations, the implied valuation is S$0.89 per share at 11.9x EV/EBITDA.
We revise our FY15/FY16 forecasts and introduce FY17 forecast.
Maintain BUY with revised target price of S$1.08.

Wall Street Journal (WSJ) reported last Thursday, citing people close to the matter, that Temasek Holdings was putting NOL up for sale.
This comes on the back of NOL’s recent US$1.2b sale of APL Logistics, its logistics arm.
According to the WSJ, NOL has been shopping around to prospective buyers in recent months. It had been in talks recently with a prospective buyer but could not agree on price.

While NOL and Temasek have declined comment, the sale of NOL is highly probable.
According to industry participants, there is a growing sense that NOL is no longer considered a strategic asset to Temasek, which sets the tone for its disposal.
The recent disposal of APL Logistics strengthens the disposal proposition as it makes NOL a pure liner play.
In its previous form, a disposal was more difficult as the business combination attracted different interests.
The sale of its only profit-making business now makes commercial sense due to the ultimate purpose it served.

Assuming the sale of NOL an eventuality, we look for comparable transactions in the sector that will provide guidance to what NOL might possibly transact for.
Between 2005-13, there were no major M&A deals, and recent transactions such as Hapag-Lloyd’s acquisition of CSVA in 2014 was non-public.
Hapag-Lloyd’s upcoming IPO is a good proxy, and was reportedly valued at €5b (US$5.5b) according to several newslines. The firm recently reported a 1Q15 EBITDA of €284m, which possibly prices the IPO at roughly 4.4x FY15 EV/EBITDA.
As a sanity check, we note that Hapag-Lloyd has previously transacted with TUI AG at 4.64x and 2.65x in 2008 and 2011 respectively.
A transaction for NOL at this multiple would be untenable, as the implied equity value would be negative.
Average EV/EBITDA transaction multiple of 11.9x. Based on KPMG’s Transport Tracker Apr 15 report, the average transaction multiple for the transport sector was 11.9x for 2014.
Recent transactions of smaller shipping companies saw transaction multiples between 7.6x to 10.9x. This compares with an average trading multiple of 14.6x for shipping.
We use a transaction multiple as it represents valuations that actual deals have closed at.

Assuming transaction EV/EBITDA multiple of 11.9x and US$409m FY15F core EBITDA, NOL’s equity value comes up to US$1.8b or S$0.89 per share, implying 0.67x 2015F P/B.
We use core EBITDA as NOL will transact as a stand-alone liner business.
Our unadjusted EBITDA is US$450m, which is comparable with consensus FY15F EBITDA estimate of US$447m.
The equity value is highly sensitive to the EBITDA estimate, changing 3% for every 1% change in EBITDA.
While our estimated offer falls short of our target price of S$1.08, 11.9x represents a 10% premium over NOL’s estimated 10.8x 2015F EV/EBITDA, a fair deal considering it is hardly profitable at this juncture.

Using the divestment of APL Logistics as a guide, Temasek is likely to seek a valuation multiple above 11.9x. The logistics business was transacted at an implied 15x EV/EBITDA, significantly over the mean transaction/IPO multiple of 9.6x/9.8x and trading multiple of 11.4x.
As seen from the sensitivity table on the right, a 10% increase in the EV/EBITDA multiple would increase the equity valuation by 28%.

We assume coverage and revise our FY15-16 forecasts. Our revised FY15 forecast is US$685m, up from US$29m previously as we factor a US$0.9b gain from the sale of APL Logistics.
We reduce our FY16F earnings from US$148m to US$40m, down 73% as the industry outlook for container shipping continues to remain soft.
We introduce earnings forecast for FY17 at US$124m.

Our revised target price is based on 0.8x FY16F P/B representing a 20% discount from the sector average of 1.02x, applied due to the weak business outlook for container shipping.
Our analysis indicates that an offer at the average transaction multiples would provide minimal upside from current share price.
However, Temasek is likely to push for higher valuations, and substantial upside exists at an offer above 11.9x.
The share is currently trading close to its book value of S$0.93, or 0.94x 1QFY15 P/B.

(Foo Zhiwei)

Source: http://research.uobkayhian.com/

SGinvestors.io - Where SG Investors Share