Neptune Orient Lines - CIMB Securities 2016-02-24: 4Q15 losses portends a challenging 1H16

NOL NEPTUNE ORIENT LINES LIMITED N03.SI

Neptune Orient Lines - 4Q15 losses portends a challenging 1H16

NOL delivered full-year core net losses that were 7% lower-than-expected, as we had overestimated depreciation expense.
However, this is no reason to celebrate, as NOL’s 2H15 losses were more than double 2H14’s, reversing the yoy gains enjoyed during 1H15.

This foreshadows a very tough 1H16, not just for NOL, but for the entire industry, which is why we have raised FY16 core loss estimates by 42%.
We maintain Hold, with our target price based on CMA CGM’s planned voluntary general offer at S$1.30/share.

NOL started FY15 with great promise, with 1H15 core losses narrowing 95% yoy as a result of bunker cost savings, the lagged impact of the bunker surcharge reduction, the positive freight rate impact from the US west coast port congestion, and NOL’s own cost saving initiatives.
However, NOL’s average freight rates declined at a faster pace during 2H15 as a result of weak trade growth, strong competition, and excess slot capacity. As a result, NOL’s 2H15 losses were 117% higher yoy.

NOL shared some trade growth figures for the recently-completed 4Q15: transpacific (TP) eastbound volumes fell 6% yoy, Asia-Europe (AE) westbound fell 1% yoy, and Asia-Middle East (A/ME) fell 2% yoy.
While NOL enjoyed decent pre-Lunar New Year volumes (with headhaul loads in excess of 90%), the post-LNY period has been very weak, as is the case every year.
Chinese imports have been weakening, not just imports of intermediate goods, but also of finished goods, due to the slowing Chinese economy.

In the early part of 2016, freight rates continue to be under pressure, on all major eastwest trade lanes, including TP, AE, and A/ME. Middle East imports have been crimped due to weak oil revenues.
NOL is currently negotiating its 2016/17 TP contracts, and was happy to report strong customer satisfaction and therefore, expects contract volumes to be robust. However, its Beneficial Cargo Owner (BCO) customers have asked for lower contract rates.
AE contract rates are also being pressured lower.

All the documents related to CMA CGM’s proposed acquisition of NOL have been submitted to the regulators, and neither party has encountered any difficulties so far.
NOL continues to believe that final regulatory approval will be obtained by mid-2016.
We agree with this assessment, since NOL’s entry into the Ocean Three alliance will not disrupt the competitive dynamics to a degree that will raise the concern of the regulators.

Once the regulatory approvals are obtained (hopefully by mid-2016), CMA CGM will proceed with the VGO, and the entire transaction should be completed by August 2016.
We believe minorities will accept CMA CGM’s planned offer, given that Temasek has given an undertaking to tender its entire 66.8% stake, and because of the current weak state of the container shipping industry.

Raymond YAP CFA CIMB Securities | http://research.itradecimb.com/ 2016-02-24

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 1.30 Same 1.30