NOL Neptune Orient Lines - CIMB Securities 2015-11-02: Big losses again…but it may not matter at all

NOL NEPTUNE ORIENT LINES LIMITED N03.SI

Neptune Orient Lines - Big losses again…but it may not matter at all

NOL reported a 3Q15 core net loss of US$87m, worse than the year before as the freight rate declines more than wiped out bunker cost savings.
The weaker-than-expected performance forces us triple the core EPS loss forecast for FY15, and downgrade FY16-17 to losses from marginal profits before.
We maintain Hold with a lower target price of S$0.95, rolling our P/BV valuation of 0.76x (1 s.d. below average since 2001) forward one year to end-CY16.

More important than NOL’s operating performance is whether Temasek will succeed in selling its stake, which could lead to a significant rerating of the stock.

NOL suffered terribly during 3Q15, reporting a core net loss of US$87m against a much smaller US$14m loss a year ago. The absence of US$14m in logistics profits earned during 3Q14 accounted for only 19% of the gap.
For 9M15, NOL still succeeded in delivering lower losses of US$96m vs. US$181m loss during 9M14, due to the beneficial impact of lower bunker prices during 1H15. But as time went by, the industry reduced freight rates by more than their bunker cost savings, leading to margin compression.

Comparing 3Q15 vs 3Q14, APL reported US$106m in bunker cost savings, but this was overwhelmed by US$265m in lost revenue as freight rates fell 21% yoy, and US$77m in lost profits due to lower volumes.
Other cost savings yielded only an incremental US$163m yoy – on “network optimisation, charter expiries, targeted cargo selection, yield management, on-time fleet performance, and less inland transportation expenses”.

APL saw its 3Q15 Asia-Europe (AE) volumes fall 11% and rates fall a staggering 35%. APL’s AE volume decline is comparable to OOCL’s, but OOCL suffered a rate decline of ‘only’ 23% yoy on the trade.
Meanwhile, APL’s transpacific (TP) volumes fell 17% yoy in 3Q15, underperforming OOCL’s 9.5% volume rise, although both suffered 9-10% yoy TP rate declines.
On the Intra-Asia trade, APL suffered a 24.5% yoy rate decline during 3Q, against OOCL’s 17% rate fall. APL clearly underperformed OOCL materially.

APL has lost market share in the container shipping trades, carrying only 577k teus in 3Q15 against 707k teus in 3Q12, at a 3-year CAGR of -6.5%. Without any investment in ships of above 18k teu, APL’s future survival in the AE trades is in doubt. Its market share in its core TP trade has also declined, as its TP volumes have declined at an annual rate of 8.2% since 3Q12. This explains why Temasek has put up APL for sale.

Temasek was said to have put up its stake in NOL for sale at an asking price of US$4bn, or S$3 per NOL share.
CMA CGM had apparently bid at S$1.50, which is at a 11% premium to NOL’s book value of S$1.35 at end-3Q15. That bid was rejected by Temasek, but UASC may still be considering putting in a bid, which would clearly have to above S$1.50/share.
If Temasek succeeds in finding a buyer for NOL, it may lead to a MGO for the remaining NOL shares, or a big special dividend if APL is sold instead.

Raymond YAP CFA CIMB Securities | http://research.itradecimb.com/ 2015-11-02

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.95 Down 1.02