• Cost management offset 1Q15 weakness
• Near-term headwinds to sustain
• Incorporate divestment; maintain HOLD

1Q15 results improved YoY on cost savings

With the divestment of its logistics business almost completed, Neptune Orient Lines Limited’s (NOL) 1Q15 results from continuing operations were not a surprise to us after seeing disciplined cost management over the past few quarters. Liner’s revenue fell 13% YoY to US$1.58b due to decrease in Liner’s revenue from planned capacity cuts, void sailings and muted freight rates. US West Coast (USWC) port congestion added to the 15% YoY decline in liner’s volume. Correspondingly, 1Q15 cost of sales dropped 22% YoY to US$1.45b, driven by savings of ~US$258m from network improvements and lower bunker cost. As a result of disciplined cost management and operational efficiency, NOL’s 1Q15 net loss from continuing business dropped 71% to US$36m but core EBIT turned positive to US$13m from negative of US$82m in 1Q14.

Uncertain volume and rates’ outlook

In-line with our view, NOL’s management stated: 1) industry overcapacity to continue to continue and 2) improved US West Coast ports’ productivity after tentative labour agreement was reached in Feb-15. That said, we expect the large backlog of containers built up from USWC congestion to take at least six to eight weeks to work through, and we expect some spill over into early 2Q15.

For freight rates, we expect downward pressures to be sustained as world trade volume is likely to be soft while capacity to expand by ~8% in FY15. With 41% (1Q15) exposure to transpacific routes, the catalyst for NOL will be increases in transpacific freight rates driven by recovery in U.S. economy leading to higher trade volume. While there are efforts to push for such increases, we remain unsure of whether these efforts will hold (refer to page 2). However, with management’s focus on cost management and improving operational efficiency, we believe it will help mitigate the uncertain outlook.

Incorporate divestment; maintain HOLD

We incorporate the impact of divestment of APL Logistics (refer to page 2) in our forecasts as we think regulatory approval will most likely be obtained. Based on a higher FY15F NBV and 0.80x P/B (discounted for near-term weakness and slower longer-term recovery without APLL), we derive a FV of S$1.15 (prev: S$1.01). Maintain HOLD on NOL.

Source: OCBC Research - 15 May 2015