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 JOC.com, there are indications that BCOs are signing 2016/17 contracts with rates to:
- USWC ranging from S$1,100-S$1,400/FEU compared to S$1,600-S$1,800/FEU in 2015/16 contracts, and
- 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
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http://www.ocbcresearch.com/
2016-03-24
OCBC Securities
SGX Stock
Analyst Report
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