Neptune Orient Lines - DBS Research 2015-11-02: Peak season brings no joy

NOL NEPTUNE ORIENT LINES LIMITED N03.SI

Neptune Orient Lines - Peak season brings no joy

Wider-than-expected losses of US$96m in 3Q15 on the back of depressed freight rates across trade lanes.
As new orders continue to gain steam in 2015, industry overcapacity set to continue into 2017.
We now expect NOL to remain in the red in 2016 as well.
Downgrade to HOLD with lower TP of S$1.00.

Neptune Orient Lines (NOL) reported higher than expected losses of US$96m in 3Q15, in what was its first quarter of life without the logistics segment.
Results deteriorated sharply in 3Q15 from 2Q15 levels – when the liner division had posted net loss of US$11m – due to further steep erosion in freight rates during 3Q, which is traditionally the peak quarter for container shipping.
The peak season unfortunately did not translate to peak rates, as the SCFI spot rate index in 3Q15 was down 38% y-o-y and 3% q-o-q due to overcapacity. Hence, NOL’s average freight rate in 3Q15 was down 20% y-o-y and 8% q-o-q to US$2,093 per FEU, and more than offset the continuing improvement in operating costs per FEU.

As the race for 18,000 TEU ships heats up, new orders have crossed the 1.8m TEU mark in 2015 already, far ahead of the 1.0m TEU new orders seen in 2014.
The delivery pipeline now stretches well into 2018 and average fleet growth over 2015-17 period is estimated at around 6.5% per year, while container trade demand will grow at best around 4-5% p.a. Thus, the oversupply situation looks set to continue into 2017, and despite idle fleet creeping up to almost 4% of total fleet currently, we do not think liners are thinking beyond market share currently.

We now expect NOL to post core losses of close to US$200m in each of FY15 and FY16, compared to our earlier expectations of modest profit, as we revise our freight rate assumptions downwards taking into account recent trends.
With the stock having outperformed the STI by more than 17% since our upgrade in July, we think further upside is limited as we cut our TP to S$1.00 (0.8x P/BV) in line with the earnings cut.
Downgrade to HOLD. Any resumption of activity on the M&A front could be the only upside catalyst as fundamentals fail to inspire.

Suvro SARKAR DBS Vickers | http://www.dbsvickers.com/ 2015-11-02

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