NOL
NEPTUNE ORIENT LINES LIMITED
N03.SI
Neptune Orient Lines (NOL SP) 4Q15: Continued Industry Headwinds Hamper Operational Headway
- NOL reported 4Q15 net loss of US$75m, with its Liner business reporting a US$77m loss.
- Cost savings from operational efficiencies continued to be hampered by weak freight rates and trade volumes.
- Freight rates and trade volumes fell another 17% and 13% respectively for 4Q15, with further weakness already seen in 2016.
- Industry outlook remains poor and we revise our 2016 estimates to reflect losses.
- CMA-CGMNOL deal remains on track for 2016 completion.
- ACCEPT THE OFFER of S$1.30.
RESULTS
4Q15 net loss of US$77m.
- Neptune Orient Lines (NOL) reported a 4Q15 net loss of US$75m, with its Liner business making a net loss of US$77m.
- Full-year results were inline with expectations for a loss, which stood at US$181m excluding disposal gains.
- Net loss from continuing operations was US$220m for 2015, a 41% improvement over the loss of US$374m in 2014.
- Discontinued operations (Logistics) reported a net profit of US$39m, excluding the US$888m disposal gain.
- The reduced loss for 2015 from continued operations was primarily attributable to its cost saving programme, which saw freight costs decline 14% for the period. This was offset by a combination of lower freight rates and volumes, which fell 17% and 13% yoy respectively
Cost savings of US$100m.
- NOL achieved cost savings of US$100m for 4Q15, of which US$48m was due to cost optimisation, US$44m from charter expiries and US$8m from fixed terminal and equipment. Including bunker fuel and variable cost savings, NOL saved US$358m in 4Q15. This was more than offset by the EBIT decline of US$387m from falling volumes and rates.
Continued decline in volumes.
- Volumes fell by 12% on average in 4Q15, led by sharp declines on all routes save its Intra-Asia Westbound. The Americas and Intra Asia routes, which collectively make up about 80% of its volumes, fell 15% and 5% respectively.
- Declines were the sharpest on its European routes (Asia-Europe, Transatlantic), which fell 25% yoy. Its European routes make up about 20% of its yearly volumes.
Freight rates fell 19% yoy in 4Q15.
- Freight rates weakened again in 4Q15, declining 19% yoy on average. Rates on its primary trade routes, the Transpacific and Intra-Asia, fell to US$2,809/FEU (-12%) and US$1,010/FEU (-24%) respectively. Rates on its European based routes fell sharply, declining 36-59% yoy.
No dividend announced for 2015.
- As expected, no dividend was announced despite NOL’s divestment of APL Logistics. All monies were utilised to reduce NOL’s debt as guided, and the lack of profit from its Liner business did not warrant a dividend.
Net gearing at 107%.
- Net gearing fell to 107% for 2015, largely due to the paydown of debt using the US$1.2b proceeds from its sale of APL Logistics in 2Q15.
STOCK IMPACT
No near-term improvement for container shipping.
- Excluding a one-off spike in early Jan, freight rates remain at historical low as overcapacity shows no signs of easing. Despite moderate capacity growth of 4.6% for 2016, the lowest since 1990, idle rates remain high at 6.8% of total fleet as the glut of ships carried over from 2015 keep supply high. This coupled with weak demand growth which has slumped to the lowest since 2010, has resulted in the market remaining very much out of balance for the near term.
- According to Alphaliner, it will take at least a few more years of low capacity growth and scrapping for this imbalance to recede.
- As such, we expect weak rates and volumes with no recovery in sight for the next few years.
CMA-CGM acquisition remains on track for 2016 close.
- According to management, NOL and CMA-CGM had both made all the requisite regulatory anti-trust filings to the European Union, the People’s Republic of China and the US.
- No difficulties were reported and NOL reiterated its expectation that all anti-trust clearances will be obtained by mid- 16.
- We are also re-assured by CMA-CGM’s commitment to the deal despite industry weakness via the steady purchase of NOL shares in the open market. To date, they have acquired 3.95% of NOL’s shares.
EARNINGS REVISION/RISK
- FY16 capex guidance of US$100m-200m. We have assumed US$120m capex for 2016.
- Reduce 2016 earnings to a loss of US$190m. With the industry outlook remaining weak, and the sharper-than-expected plunge in freight rates, we have revised our 2016 earnings estimate to a loss of US$190m from a profit of US$25m.
- Our earnings estimate for 2017 is similarly lowered to a loss of US$6m, as we do not foresee a recovery in the near-term. We introduce our 2018 earnings estimate at US$27m.
VALUATION/RECOMMENDATION
ACCEPT THE OFFER.
- As it stands, the acquisition appears as an eventuality and we have changed our target price to S$1.30 to reflect CMA-CGM’s pre-conditional offer price.
- We re-iterate that the weakening shipping outlook will not present better offers from other parties. Therefore, we recommend investors accept the offer.
NOL’s 2017 bonds may provide further yield.
- With no dividend likely for 2016, and only 4% upside left from the offer price, existing shareholders may consider switching into NOL’s 4.25% bond due 2017 to eke out additional yield.
- The 2017 bond has a yield-to-maturity of about 6%, with a “Change in Control” clause that requires the acquirer to either step-up the coupon rate to 5.75% or redeem the bond at face value.
Foo Zhi Wei
UOB Kay Hian
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http://research.uobkayhian.com/
2016-02-24
UOB Kay Hian
SGX Stock
Analyst Report
1.30
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1.30
