• 3 consecutive years of losses
• Tough industry outlook
• Share price mainly supported by offer

Liner’s net loss narrowed

Neptune Orient Lines Ltd’s (NOL) 4Q15 core earnings (liner business) remained in the red but net loss narrowed 36.8% YoY to S$77.3m. 4Q15 revenue fell 28.5% YoY to US$1.28b due to void sailings, challenging freight rates and weak container trade demand. 4Q15 cost of sales declined 27.7% YoY to US$1.23b mainly on cost savings of US$100m (network optimisation and charter expiries) and a US$130m decline in bunker price.

However, cost savings and cheaper bunker were not enough to offset the volume decline (US$99m) and plunge in freight rates (US$288m), which led to a higher negative 4Q15 core liner EBIT of US$65m compared to - US$36m in 4Q14. For FY15, NOL’s FY15 net loss narrowed 41.1% to S$220.4m despite a 23.4% drop in revenue to S$5.38b, as cost of sales declined 25.2% to S$5.03b.

Industry hammered on two fronts

Management has guided for a challenging year and we believe the muted outlook will persist on two key reasons:

1) weak global trade growth on uncertain global economic outlook; and

2) overcapacity of containerships will exert downward pressures on already low freight rates.

For 4Q15, Transpacific (TP), Asia-Europe (AE) and Asia-Middle East (A-ME) trade routes formed 45.8%, 13.0% and 29.2% of NOL’s liner revenue. However, overcapacity continued to push freight rates lower as its 4Q15 average revenue per FEU for TP, AE and A-ME trade routes fell 12.1%, 35.8% and 24.3% YoY, respectively.

Demand also fell significantly as 4Q15 trade volume on its TP, AE and A-ME routes declined 12.7%, 16.2% and 5.4% YoY, respectively. We expect these weakening industry trends to persist in FY16 on reasons stated above.

Acquisition awaiting regulatory approvals

Holding our view of a muted shipping industry outlook, we opt to keep our forecasts largely unchanged with a higher FV of S$1.00 on stronger balance sheet.

We also noted CMA CGM has been increasing its stake in NOL through open market purchase, and with NOL 'management expecting regulatory approvals to come through by 2H16, we believe the offer will likely achieve its pre-conditions.

Hence, with offer price of S$1.30 higher than our FV estimate, we continue to recommend investors to ACCEPT THE OFFER.

Source: OCBC Research - 24 Feb 2016