NOL
NEPTUNE ORIENT LINES LIMITED
N03.SI
Neptune Orient Lines (NOL SP) 3Q15: US$96m Loss As Lower Rates And Volumes Negate Cost Savings
- 3Q15 saw a loss of US$96m as lower rates and volumes for what was supposedly liner peak season negated all cost savings.
- Liner outlook remains weak, and with 4Q15 a slack season, no recovery is in sight for 2015.
- Sole catalyst for the stock remains Temasek’s sale of the beleaguered liner, which we deem unlikely to happen this year.
- We reduce earnings estimates by 23-34%.
- Lower target price to S$1.06 and downgrade to HOLD.
- Entry price: S$0.80
RESULTS
• Freight rates drop 21% on overcapacity; 3Q15 sees a loss of US$95.6m.
- NOL reported 3Q15 loss of US$95.6m, below expectations given that 3Q typically represents peak season. Continuing operations for 9M15 reported a US$141m net loss vs net loss of US$250m in the previous period. Overcapacity led to a 21% decline in freight rates, and coupled with an 11% decline in liner volume, led to revenue declining 28% for the quarter.
• Liner reports a core EBIT loss of US$66m for 3Q15.
- NOL reported a 3Q15 core EBIT loss of US$66m, primarily due to the lower freight rate. While NOL reduced costs by US$269m in 3Q15, the steep decline of US$342m resulting from lower rates and volume offset the gains and resulted in the operational loss. For 9M15, liner core EBIT was a loss of US$33m, an improvement of US$70m in 9M14.
STOCK IMPACT
• No recovery in sight.
- 3Q typically represents a peak season for liners. However, the surprise decline in volume as well as freight rates have put off all hopes of a recovery in 2015.
- Earnings are expected to decline as spot freight rates usually weaken in the 4Q slack season. Slowing economic growth in China, weak European and American economic growth underpin the weakness that is low volumes in the container shipping market.
• APL incurs a US$9.8m fine from the US government.
- 4Q15 earnings will be marred by a US$9.8m exceptional item. Media reports that APL, the container arm of NOL, will pay the US government a US$9.8m fine to smooth over claims for violating the False Claims Act. This was due to APL billing the US Department of Defence for tracking services that it knew failed/ partially failed to transmit data. APL is required to place satellite tracking devices on containers shipped from Karachi to US military bases in Afghanistan.
• Sale of NOL is the only catalyst.
- With no near-term recovery of the container market in sight, the sole catalyst for NOL remains its potential sale and divestment by Temasek Holdings (TH). Their intention to sell had earlier been highlighted by the Wall Street Journal (WSJ). Thus far, the company has been shopped to various potential customers, but could not come to an agreement on price.
- We think that TH may be asking for a 1.0x P/B (S$1.36 per share as of 3Q15), which is close to the S$1.30 rights issue price TH exercised its entitlement for, but still below the S$2.80 bid price that saw TH expand its holdings to current level of 67.1%.
• Hapag-Llyod IPO priced at 0.47-0.52 P/B.
- Hapag-Llyod (HL), the fifth largest liner operator by TEU (Alphaliner, Nov 15), will be carrying out its IPO listing on 6 Nov 15. Based on the latest news, the offer price has been revised from €23-29/share to €20- 22/share, valuing it at 0.47-0.52x times book value. This comes on the back of a profit warning from shipping industry leader AP Moeller-Maersk, which sees no recovery for 2015. Given the low comparables, we think a sale of NOL at HL’s multiples (S$0.61- 0.68/share) would not be compelling for TH to relinquish its stake for now.
EARNINGS REVISION/RISK
• Reduce 2015-17 earnings by 23-34%.
- We reduce 2015 earnings by 23% to US$661m, and 2016-17 earnings to US$25.1m (-34%) and US$78m (-23%) respectively. The outlook for container shipping remains bleak, with weaker volumes and freight rates. Cost cutting remains NOL’s viable option to return to profitability.
VALUATION/RECOMMENDATION
• Downgrade to HOLD, lower target price to S$1.06 based on 0.8x 2016F P/B.
- We revise our target price to S$1.06, largely due to a revision in earnings arising from the weaker-than-expected 3Q15 earnings. With no earnings recovery and a potential sale of NOL by TH, we cut our recommendation to HOLD. Recommended entry price is S$0.80.
SHARE PRICE CATALYST
- Freight rate increase and a recovery in the global economy.
- NOL’s sale.
Foo Zhi Wei
UOB Kay Hian
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http://research.uobkayhian.com/
2015-11-02
UOB Kay Hian
SGX Stock
Analyst Report
1.06
Down
1.15
