• One-time divestment gain in 2Q15
• Slight transpacific rates’ improvement
• Tough times not over yet; maintain HOLD

Operational efficiency continues to bear fruit

Neptune Orient Lines Ltd’s (NOL) 2Q15 results from continuing operations improved as operational efficiency continues to drive substantial savings. 2Q15 revenue fell 22.0% YoY to US$1.32b due to planned capacity cuts, void sailings and falling freight rates. Correspondingly, 2Q15 cost of sales declined 25.6% YoY to US$1.19b mainly on cost savings of US$100m, driven mainly by network optimization and a US$107m drop in bunker price.

These savings and cheaper bunker helped offset the decline in volume and plunge in freight rates, as 2Q15 core EBIT came in positive at US$20m compared to negative US$28m the same period a year ago. Consequently, NOL’s 2Q15 net loss from continuing operations decreased 86.1% YoY to S$10.9m. 2Q15 also saw the completion of NOL’s divestment of its APL Logistics (APLL) business for a final purchase price of US$1.24b, resulting in a gain of US$886.6m.

Slight recovery in transpacific rates

Transpacific (TP) and Asia-Europe (AE) trade routes formed 43.2% and 15.7% of NOL’s liner revenue for 1H15. According to management, AE routes’ peak season remains muted with a 4% YoY decline for 1H15 while TP trade routes saw a ~4-5% growth with further volume increase during Aug-Oct 15. Beneficiary cargo owners’ (BCOs) contracts form ~65-70% of NOL’s total exposure in TP routes, with the remaining shipments based on spot rates.

Management noted modest recovery in TP contracted rates that will last till Apr 16 and even with the decline in USWC spot rates, no renegotiation has taken place for now. For AE routes, BCOs contracts form ~20% of NOL’s total AE exposure. We think the limited exposure on AE routes helps mitigate the rates plunge impact on NOL.

Industry overcapacity to persist; maintain HOLD

While we note encouraging development on the TP routes, overcapacity remains a concern and we believe the tough times are not over for the industry yet. Incorporating 2Q15 results and given the overall muted outlook, our FY16F PATMI is reduced by 6.9% and we now forecast a slight loss in FY17. Rolling forward to 0.8x FY17F P/B (-0.25 SD 7-year mean), our FV drops to S$1.00 (prev: S$1.15). Maintain HOLD.

Source: OCBC Research - 31 Jul 2015