4Q2012 results dip, but take heart from positives. Neptune Orient Lines (NOL) reported a 4Q2012 core EBIT loss of USD69m, which was a significant improvement from 4Q11’s loss of USD277m. Although not within range of the EBIT breakeven we were hoping for, we still see enough signs to reaffirm NOL’s early-stage recovery from the container shipping slump. We are maintaining our forecasts and reiterating our BUY call pegged to 1.4x FY2013 P/B, Target Price trimmed to SGD1.63 based on NOL’s updated NAV.

Improvements from the core; Logistics steady. In addition to improved profitability YoY, another positive for FY2012 was the fact that NOL swung back to positive core EBITDA of USD103m vs the negative USD82m in FY2011. Liner operating cost/FEU also declined by ~5% YoY driven by efficiency improvements. These put NOL’s Liner segment in a better shape to take on the industry in 2013 versus a year ago. NOL Logistics’ core EBIT was relatively steady at USD67m.

Outlook: a better performance in 2013. Management acknowledged that the global economy has shown signs of improvement, although oversupply continues to cause freight rate uncertainty. They expect a better performance vs 2012 barring unforeseen circumstances. There was optimism for the trans-pacific route due to encouraging US macroeconomic indicators as well as continued evidence of liner co-operation pushing idle capacity to more than 5% of global capacity.

Price weakness presents opportunity to BUY. We advise investors to look past seasonally weak quarters such as this 4Q2012, and more towards peak quarters likely in 2Q and 3Q2013 to cement NOL’s turnaround. We believe that NOL’s strength in the trans-pacific trade, its leaner cost base, and encouraging economic indicators from the US and China will culminate in a profitable year for NOL in 2013. A more muted industry supply situation in 2014 will provide the plump rewards for those who invest early in the recovery cycle. Reiterate BUY, Target Price of SGD1.63 remains pegged to 1.4x FY2013 P/BV.

Source: Maybank Kim Eng Research - 25 Feb 2013