A weak showing in a traditionally peak season. At first glance a net profit of USD20m for 3Q13 seems commendable amid a challenging operating environment, however, we would like to highlight that it was inflated by an USD33.9m foreign exchange gain. Without this one-off gain, it would have been a loss-making quarter. 3Q13 revenue at its core liner unit missed our expectation on account of a 5% decline in trade volume and 9% contraction in rates.

Spot rates continue to slide post peak season. While the industry managed to push through a decent amount of peak season rate hike in 3Q13, spot rates have declined sharply in recent weeks. As indicated by the spot driven Shanghai Containerized Freight Index (SCFI), industry rates are now comparable to lows reached in 4Q11 (see Fig 3), when a huge loss of USD320m was reported. Hence, we expect a poor end to the year with profitability dipping into the red in 4Q13.

Rising net gearing; dividends to be suspended until FY14. Due to further cash outlays to fund its ongoing fleet renewals, NOL’s net gearing has hit a high of 1.6x at end-September 2013. With continued CAPEX spending and sustained margin compression, we expect net gearing to rise to 1.8x by FY14. Hence, we expect zero payouts till FY15 and do not rule out another round of fundraising to shore up its weakened balance sheet.

Maintain Hold; TP: SGD1.01. We cut our earnings forecasts to reflect the weak rate environment and project another loss-making year in FY14. We expect the ongoing cost-cutting initiatives will lower average slot cost to be offset by depressed freight rates. We roll forward our valuation basis and derive our TP of SGD1.01, based on 1.0x FY14 BVPS. Maintain HOLD.  

Source: Maybank Kim Eng Research - 31 Oct 2013