• 3Q15 still in the red
• Peak season did not materialise
• Facing macro pressures; maintain HOLD

Net loss widened in 3Q15

Neptune Orient Lines Ltd’s (NOL) 3Q15 core earnings (liner business) remained in the red as net loss widened 85.6% YoY to S$95.6m. 3Q15 revenue fell 28.0% YoY to US$1.21b due to void sailings, absence of peak season, falling freight rates and weak container trade demand. In-line with lower revenue, 3Q15 cost of sales declined 25.6% YoY to US$1.16b mainly on cost savings of US$80m (network optimisation and charter expiries) and a US$106m decline in bunker price.

However, cost savings and cheaper bunker were not enough to offset the decline in volume (US$77m) and plunge in freight rates (US$265m), resulting in a negative 3Q15 core liner EBIT of US$66m compared to +US$7m in 3Q14. Including APL logistics (which was disposed in 2Q15) earnings in 3Q14, 3Q15 net loss increased 316.0% YoY.

Weak freight rates due to persistent overcapacity

Transpacific (TP), Asia-Europe (AE) and AsiaMiddle East (A-ME) trade routes formed ~46.1%, ~13.9% and ~27.4% of NOL’s liner revenue for 3Q15. Persistent overcapacity in the container shipping industry has pushed spot freight rates weaker as NOL’s average revenue per FEU for TP, AE and A-ME trade routes fell 9.5%, 34.7% and 24.5% YoY, respectively.

To make things worse, demand also fell significantly as trade volume on NOL’s TP, AE and A-ME routes declined 16.7%, 11.4% and 2.8% YoY, respectively. As a result of its large exposure to the TP route, the absence of the peak summer season materially impacted NOL’s revenue. However, we note that NOL had been effective in its cost savings initiatives such as through network optimisation. The liner is also likely to see further cost savings through three scheduled charter expiries in 4Q15.

Challenging environment ahead; maintain HOLD

Despite efforts to increase operational efficiencies, we believe they are not enough to offset the challenging outlook ahead. Hence, we cut our FY15/16F PATMI by 5.4/80.7% and now forecast deeper net loss in FY16F. Consequently, our FV drops from S$1.00 to S$0.96 based on 0.75x FY16F P/B (-1SD 7-year mean). Maintain HOLD.

Source: OCBC Research - 2 Nov 2015