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

How Much Would NOL Fetch In A Sale? 


  • 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. 


WHAT’S NEW 


• NOL potentially up for sale. 

  • 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. 


STOCK IMPACT 


• NOL sale highly probable. 

  • 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. 

• Hapag-Lloyd IPO approximated at €5b. 

  • 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. 

• Possible equity offer of S$0.89 per share at 11.9x EV/EBITDA. 

  • 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. 

• Temasek likely to hold out for highest possible deal. 

  • 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%. 


EARNINGS REVISION/RISK 


• Reduce 2016F earnings by 73% and introduce 2017 earnings. 

  • 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. 


VALUATION/RECOMMENDATION 


• Maintain BUY with revised target price of S$1.08 based on 0.8x FY16F P/B. 

  • 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. 


SHARE PRICE CATALYST 


  • Freight rate increase and a recovery in the global economy. 
  • Confirmation of NOL’s sale.


(Foo Zhiwei)

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




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