• Losses continued into 3QFY14
• Freight rates remain under pressures
• Lower FV; maintain HOLD

Losses for 3Q14 despite peak season

Neptune Orient Lines Limited (“NOL”) reported net loss of US$23.1m for 3Q14, a significant reversal from 3Q13 PATMI of US$20.0m. NOL’s 9M14 net loss of US$174.8m suggests our FY14 forecast net loss of US$268.7m could be overly conservative, and we consequently lower our forecast to net loss of US$250m. While we expected higher revenue in 3Q14 being the peak season for the industry, we saw revenue remained unchanged from the same period a year ago at US$2.06b, which is ~3.5% below our forecast. Note that while 3Q14 revenue for its liner segment declined 2% YoY to US$1,680m on lower volume and freight rate pressures, its 3Q14 core EBIT increased to US$6m from 3Q13’s US$3m due to management focus on operational efficiency. The management’s costs management efforts were also dampened by the increased costs from Southern California port congestion. Also, NOL’s logistics segment saw an 8% increase in revenue to US$399m.

Profitability remains depressed on freight rates pressures

We continue to believe that pressures on freight rates will not ease anytime soon due to the oncoming supply of new vessels growing at 8.0% in 2015, as forecasted by Alphaliner. Moreover, we do not think trade volume going into 2015 will be encouraging. That said, we think management’s efforts on managing costs through network optimization as well as more fuel efficient fleet will continue to see cost savings. While YTD 9M14 already saw cost savings of US$290m, we expect further increase in the savings for the remaining FY14. However, we believe port congestions at Southern California will persist into 4Q14 resulting in higher operating costs, eroding cost savings, putting pressure on profitability.

Lower FV; maintain HOLD

Taking into account our conservative forecasts, we narrow our FY14 and FY15 net loss forecasts by 6.9% and 4.4% for FY14 and FY15 respectively. Furthermore, with net gearing of 213% as at end 3QFY14, we remain worried of its financial situation amid such challenging environment. Consequently, we lower our FV from S$0.90 to S$0.84 based on a lower 0.92x FY14F P/B (one standard deviation below its 3-year historical P/B average). Maintain HOLD.

Source: OCBC Research - 3 Nov 2014