• Uninspiring 2Q14 results
• Cost management ahead
• Maintain SELL

2Q14 results still in the red

Neptune Orient Lines' (NOL) 2Q14 results continue to be in the red. Due to lower volume in Liner segment, NOL’s 2Q14 revenue declined 1% YoY to US$2.05b, or 9.0% lower than our forecast. But operational cost efficiencies resulted in cost of sales decreasing by a correspondingly larger 2% to US$1.88b. Consequently, 2Q14 PATMI loss was 8.4% smaller than expected at US$53.7m. Though 2Q14 performance was short of indicating a turnaround, Liner’s core EBIT has nevertheless improved by narrowing loss from US$41m in 2Q13 to US$29m in 2Q14, while Logistics’ core EBIT increased from US$10m in 2Q13 to US$14m in 2Q14. 1H14 revenue decreased 2.4% to US$4.33b. 1H14 PATMI was a US$152m loss compared to a US$41m profit in 1H13, of which the latter was boosted by NOL Building disposal.

Managing costs

Liner’s 2Q14 revenue decreased 2% YoY to US$1.7b, mainly due to: 1) 9.6% decline in volume in the Intra-Asia trade lane, and 2) 2.8% fall in average revenue per FEU in the Transpacific trade lane. Overall, volume was lower by 6% due to capacity management. We note that utilisation rate averaged 95% in 2Q14. On the other hand, average revenue per FEU was held steady through better trade mix. Fleet efficiency was also improved with three newbuild deliveries and charter return of eight older and less efficient vessels. Cost and operational efficiencies helped Liner reduced its core EBIT loss by 29% YoY in 2Q14. Management expects future competitiveness to come from: 1) sustained operational efficiency, 2) slot cost reductions through a more efficient fleet, and 3) leverage on G6 Alliance.

Maintain SELL

We think that overcapacity and depressed freight rates would continue, and that costside measures alone are insufficient for turnaround. Industry headwinds are evident in the results as we see that among its main trade lanes (Transpacific, Intra-Asia and Asia-Europe), volume either declined or stayed flat while average revenue per FEU fell for all except one. As we incorporate the latest results, we derive a FV estimate of S$0.90 (previous: S$0.92). Maintain SELL.

Source: OCBC Research - 8 Aug 2014