• 1Q14 results miss estimates
• Focus on cost management ahead
• Downgrade to SELL

Better 1Q14 results but below estimates

Neptune Orient Lines' (NOL) 1Q14 results came in below ours and the street’s expectations. 1Q14 revenue declined 4% YoY to US$2.3b, which is 9.8% lower than our forecast. Correspondingly, it forms 24.1% of consensus’ FY14F revenue, which is considered below expectation as 1Q typically contributes more to the full-year revenue. 1Q14 PATMI was a US$97.9m loss, which is 18% bigger than our forecast. Note that the street is expected a full-year earnings of US$42.2m. Though 1Q14 performance has fallen short of expectations, liner’s core EBIT has nevertheless improved by narrowing loss from US$92m in 1Q13 to US$83m in 1Q14 while logistics’ core EBIT increased from US$16m in 1Q13 to US$18m.

Cost management in challenging environment

Overcapacity has pressured freight rates in APL’s core Transpacific and Intra-Asia trade lanes. On a YoY basis, industry capacity increased by 8% and 11% in Transpacific and Intra-Asia respectively. Correspondingly, average revenue/FEU fell by 5% and 11% YoY in Transpacific and Intra-Asia respectively while volumes were relatively flat, which we think has been partially mitigated by capacity management. Utilisation rate was higher by 4 ppt YoY at 95%, which helps to reduce variable costs and increase round trip profitability. As a result, cost of sales/FEU (slot cost) was 6% lower YoY. Going forward, APL will continue to focus on lowering slot costs, and charter returns due in FY14 will also lower operating costs. However, without sustained increase in freight rates, we think turning profitable will still be a challenge.

Downgrade to SELL

As we incorporate the latest results and revise ARPU downwards, we derive a fair value of S$0.92 (previous: S$0.97) based on a forward PBR of 0.99x and thus downgrade NOL to SELL.

Source: OCBC Research - 15 May 2014