Neptune Orient Lines (NOL) - OCBC Investment 2016-03-24: Purely supported by offer price

Neptune Orient Lines - OCBC Investment 2016-03-24: Purely supported by offer price NOL NEPTUNE ORIENT LINES LIMITED N03.SI 

Neptune Orient Lines: Purely supported by offer price 

  • CMA CGM slowly accumulating 
  • Limited upside remains 
  • Sell some in the market 

Open market purchases by offeror 

  • Based on SGX filings by NOL, CMA CGM has been slowly accumulating shares of Neptune Orient Lines (NOL) since early Dec 15, and has spent more than S$160m to acquire more than 130m NOL shares through open market purchases. 
  • As at market close on 23 Mar 16, CMA CGM owns ~5.21% stake in NOL. 
  • In our view, CMA CGM may be signalling that it is confident in meeting the pre-conditions of being granted anti-trust clearances in the U.S., EU, and China, and complete this acquisition. 
  • Nonetheless, with nothing confirmed, there is still the risk of preconditions not being met. 

Navigating in choppy waters 

  • We estimate ~45% of NOL’s 4Q15 revenue comes from Transpacific (TP) trade routes, of which contract rates account for 70% of the volume on TP. 
  • We believe the plunge in freight rates last year due to overcapacity is likely to dominate the in-progress 2016/17 TP service contract negotiations between the beneficial cargo owners (BCOs) and carriers. 
  • Based on last week’s data (SCFI), spot rate to U.S. West Coast (USWC) plunged 6.0% WoW or 56.5% YoY to record low of US$761/FEU while spot rate to U.S. East Coast (USEC) dropped 6.1% WoW or 57.4% YoY to US$1,659/FEU (record low was US$1,448/FEU in last week of 2015). 
  • According to, there are indications that BCOs are signing 2016/17 contracts with rates to: 
    1. USWC ranging from S$1,100-S$1,400/FEU compared to S$1,600-S$1,800/FEU in 2015/16 contracts, and 
    2. USEC ranging from S$1,800- S$2,100/FEU compared to S$3,000/FEU in the past. 
  • Furthermore, we think the uncertain global economic growth is unlikely to outpace the expected 4-5% per year growth in container fleet through 2018. 

A play of risk vs. reward 

  • NOL’s current share price of S$1.265 (23 Mar close) represents a mere 2.8% upside to the offer price of S$1.30/share compared to a significant 20.9% downside to our unchanged FV of S$1.00 if the takeover bid falls through on failure to meet pre-conditions. Hence, the risk-reward makes sense for investors to sell part of their holdings in the open market. 
  • Our rating of ACCEPT THE OFFER when pre-conditions are met remains unchanged.

Eugene Chua OCBC Securities | 2016-03-24
OCBC Securities SGX Stock Analyst Report ACCEPT OFFER Maintain ACCEPT OFFER 1.00 Same 1.00