Neptune Orient Lines - Staying Afloat, but Only Barely

Price Target: $0.90 | SELL | Downside 26% | Maybank Kim Eng Research - 10 August 2012

Bottomline still awash in red, but hit by one-offs. Neptune Orient Lines (NOL) reported a 2Q2012 Net loss of USD118m, hit by one-off charges of vessel write-downs (USD82m) and restructuring cost (USD29m). Global improvements in freight rates and prudent cost management have enabled NOL to eke out a marginal USD7m core EBIT for 2Q2012 in its liner business, but a core operating profit margin of 0.4% is hardly cause for euphoria. We maintain our SELL call based on the negative macro outlook, primarily caused by overcapacity.

Overcapacity: Why we don’t see a near-term turnaround. Investors believing that this 2Q2012 core operating profit signals a turnaround in the container shipping sector should be wary that risks still abound. The primary concern remains the persistent overcapacity situation which looks to only ease in 2014 at the earliest (Fig 5). It remains an uphill task to rely on liner co-operation to keep freight rates afloat, especially with the 8-10% YoY forecasted capacity increases in 2012 and 2013.

Demand factors clouded by uncertainty. We also see a neutral-to-negative demand outlook for the next 12 months in terms of global trade. We expect Asia-US exports to accelerate slightly in 2H2012 (stronger US demand and lagged impact of China easing) and then weaken in 1Q2013 (US faces fiscal contraction in 2013). In addition, we continue to see weak Asia-Europe demand trends, which are beginning to have an impact on business confidence in the US as well. These are not positive signs for an industry looking to fill its 10-18k TEU newbuilds looming over the near-term horizon.

Within our expectations, maintain SELL. Excluding the one-offs, NOL’s 2Q2012 core net loss of ~USD6m was within our expectations. We maintain our forecasts and SELL call, but roll forward our 0.8x P/BV valuation to FY2013 and adjust our Target Price accordingly to SGD0.90. Our recommendation remains premised on a bleak demand outlook matched with overcapacity that looks to only subside in 2014 and beyond.

Source: Maybank Kim Eng Research - 10 August 2012