NOL
NEPTUNE ORIENT LINES LIMITED
N03.SI
Neptune Orient Lines (NOL SP) 1Q16: Losses Mount As NOL Awaits CMA-CGM’s Eventual Acquisition
- NOL’s net loss widened to US$105m for 1QFY16, amid the weakening shipping environment.
- The poor results were led by declines in freight rates and volumes, which more than offset quarterly cost savings.
- Net gearing crept up to 117%.
- Shipping outlook remains gloomy, with no near-term recovery in sight.
- CMA-CGM’s acquisition plan has received the EU’s approval, and is on track for 2016 completion.
- We raise FY16 loss from US$190m to US$253m.
- ACCEPT THE OFFER of S$1.30.
RESULTS
• 1QFY16 net loss of US$105m.
- Neptune Orient Lines (NOL) reported 1QFY16 net loss of US$105m.
- Results were within expectations for a full-year loss, but the magnitude was larger than our loss estimate of US$190m, which was already the second-lowest on the street (lowest: US$198m).
- Core EBIT loss was US$84m, reversing from a US$13m profit in 1QFY15.
- The losses were brought about mainly by a 28% yoy decline in revenue on lower freight rates and hauled volumes.
- The revenue decline was partially offset by cost savings of US$265m during the quarter.
• Freight rates down an average of 23%.
- Freight rates plunged 15-37% in 1QFY16, with the Asia-Europe trade route’s being the worst. Average revenue/FEU declined 37% yoy from US$2,111 to US$1,333.
- Least impacted was the Transatlantic route, which declined 15% yoy from US$2,717 to US$2,320.
• Volumes down 6% on average.
- Hauled volumes fell 6% on average from 667,000 FEUs to 624,000 FEUs in 1QFY16.
- While volumes on the Transatlantic route fell by the greatest in percentage terms by 21%, Intra-Asia’s accounted for 42% of the decline, falling by 18,000 FEUs (-6%) for the quarter.
• Cost savings of US$60m in 1QFY16.
- NOL realised US$60m in cost savings, through US$10m in network optimisation, US$35m from charter expiries and US$15m from fixed terminal and equipment.
- In total, 1Q16 saw US$265m from its cost savings programme, variable cost savings and lower bunker fuel prices. This led to cost of sales/FEU declining 16% from US$2,166 to US$1,816. However, this was unable to offset the sharp decline of US$362m in freight rates and hauled volumes, leading to the core EBIT loss of US$84m for the quarter.
• Net gearing up 9.8ppt to 117%.
- NOL’s net gearing rose from 107% in 4QFY15 to 117% in 1QFY16.
- Operational cash flow was a negative US$56m for 1QFY16, with free cash flow at about a negative US$83m.
- Net borrowings of US$25m were made in the quarter, with the cash gap funded by its internal cash balance.
- Core EBITDA fell 84% yoy from US$115m to US$18m.
- We expect net gearing to continue creeping up as NOL draws down on more bank loans to meet its cash gap.
STOCK IMPACT
• Liner rates down 45% yoy in 1QFY16 and expected to remain low.
- A slowdown in emerging economies due to low commodity prices saw global container demand growth of 1% in 1QFY16.
- Coupled with container supply growing over 7% in the same period, rates weakened significantly. This was clearly reflected by a 45% decline in liner rates in 1QFY16.
- The index has risen 44% since end-1QFY16 due to a doubling/tripling of rates on the European trade routes (Europe & Mediterranean, combined 30% weightage). However, it still remained below 2015 levels, which hardly saw profitable operations.
• Earnings outlook for global liners remains dim.
- With the global economic outlook remaining lacklustre, we do not see demand growth catching up with the oversupply in containerships and expect low volumes to continue depressing global liners’ earnings.
- Maersk Line – the world’s number one liner by TEU capacity and container shipping bellwether – reported a 96% yoy decline in 1QFY16 net profit and has guided lower earnings for FY16. We expect NOL’s earnings to experience a similar trend.
• CMA-CGM acquisition: EU grants approval, on track for 2016 close.
- On 29 April, CMA-CGM received the go-ahead from the EU to acquire NOL, conditional on APL exiting the G6 alliance.
- NOL in its press release stated that the “remaining pre-conditions relating to anti-trust regulatory clearances (US and China) are expected to be satisfied by mid-2016”. We expect the acquisition to be completed by end-16.
• CMA-CGM’s stake in NOL at 9.6%.
- Since our last report on 24 Feb 16, CMA-CGM has acquired another 5.7% stake in NOL, with its current stake now at 9.7%. Combined with the sale of Temasek’s stake of 67%, CMA-CGM will cumulatively own 77% of NOL. This is 13% short of the 90% threshold to delist it.
- Even if the 90% threshold is not met, we believe CMA-CGM can exercise SGX Rule 1307 for a voluntary de-listing.
EARNINGS REVISION/RISK
• Revise earnings for a bigger loss of US$253m for 2016.
- With the industry outlook remaining weak and the sharper-than-expected plunge in freight rates, we further revise our loss estimate for FY16 to US$253m from US$190m.
- We have not made a larger cut to our forecast due to a 44% pickup in freight rates since end-1QFY16, which we do not expect to improve beyond FY15 levels.
- Our lower earnings are also based on lower assumptions on volumes for the year, on top of what we perceive to be limitations to cost-cutting.
- Our earnings estimates for FY17 and FY18 have also been revised down to losses of US$98m and US$66m respectively.
VALUATION/RECOMMENDATION
• ACCEPT THE OFFER.
- CMA-CGM will likely make the offer within the coming months as the approvals fall in place.
- The outlook for shipping remains weak and will likely neither draw better offers from other suitor nor result in CMA-CGM sweetening the deal.
- We recommend investors accept the offer.
Foo Zhi Wei
UOB Kay Hian
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http://research.uobkayhian.com/
2016-05-09
UOB Kay Hian
SGX Stock
Analyst Report
1.30
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