2Q13 weak but still better than expectations. Driven by the weak freight rate environment, NOL reported a 2Q13 net loss of USD35m (1QFY13: -USD76m; 2QFY12: -USD118m). Key operating metrics were better than expected but headline numbers were boosted by a gain on PPE disposal of USD11.4m. Financing expenses were also flattered by a gain from financial hedging instruments (undisclosed amount), which led to a finance income of USD0.6m (versus large negative charges in the past). On the bright side, NOL reported that cost savings of USD240m in 1H13 from its ongoing efficiency drive. On the downside, outlook remains poor with management seeing few signs of a quick recovery.

Liner division was EBITDA positive. Despite the weak rate environment, the Liner division managed to report positive core EBITDA of USD24m mainly due to significantly lower average slot cost. This was despite weaker weekly volumes, down 2% YoY, while system-wide freight rates had plunged 11% YoY in 2QFY13.

Average slot cost to continue improving in the coming quarters. Since the start of 2012, APL has taken delivery of 19 ships to replace 13 older vessels and had returned another 25 that were on charters. This led to significantly lower average operating expenses with cost of sales/FEU declining by 8% YoY in 1H13. Management also disclosed that while fleet capacity expanded by 5% YoY, bunker consumption declined by 16% YoY over the same period. By the end of 2014, APL will take delivery of another 15 vessels and increase its share of fleet owned vessels to >60% (current: 48% owned, 52% chartered) after returning the majority of its expiring charters.

Maintain Hold, TP: SGD1.28. While the container shipping industry is likely to be near its cyclical trough, we remain cautious in our recommendation as the supply overhang would continue to cap freight rate upside while the demand picture remains murky. We value NOL using 1.1X FY13-14E BVPS (long-term average: 1.2X) to derive our TP of SGD1.28. Maintain Hold.

Source: Maybank Kim Eng Research - 12 Aug 2013