• CMA CGM slowly accumulating
• Limited upside remains
• Sell some in the market

Open market purchases by offeror

Based on SGX filings by NOL, CMA CGM has been slowly accumulating shares of Neptune Orient Lines (NOL) since early Dec 15, and has spent more than S$160m to acquire more than 130m NOL shares through open market purchases.

As at market close on 23 Mar 16, CMA CGM owns ~5.21% stake in NOL. In our view, CMA CGM may be signalling that it is confident in meeting the pre-conditions of being granted anti-trust clearances in the U.S., EU, and China, and complete this acquisition. Nonetheless, with nothing confirmed, there is still the risk of preconditions not being met.

Navigating in choppy waters

We estimate ~45% of NOL’s 4Q15 revenue comes from Transpacific (TP) trade routes, of which contract rates account for 70% of the volume on TP. We believe the plunge in freight rates last year due to overcapacity is likely to dominate the in-progress 2016/17 TP service contract negotiations between the beneficial cargo owners (BCOs) and carriers.

Based on last week’s data (SCFI), spot rate to U.S. West Coast (USWC) plunged 6.0% WoW or 56.5% YoY to record low of US$761/FEU while spot rate to U.S. East Coast (USEC) dropped 6.1% WoW or 57.4% YoY to US$1,659/FEU (record low was US$1,448/FEU in last week of 2015).

According to JOC.com, there are indications that BCOs are signing 2016/17 contracts with rates to:

1) USWC ranging from S$1,100-S$1,400/FEU compared to S$1,600-S$1,800/FEU in 2015/16 contracts, and

2) USEC ranging from S$1,800- S$2,100/FEU compared to S$3,000/FEU in the past.

Furthermore, we think the uncertain global economic growth is unlikely to outpace the expected 4-5% per year growth in container fleet through 2018.

A play of risk vs. reward

NOL’s current share price of S$1.265 (23 Mar close) represents a mere 2.8% upside to the offer price of S$1.30/share compared to a significant 20.9% downside to our unchanged FV of S$1.00 if the takeover bid falls through on failure to meet pre-conditions.

Hence, the riskreward makes sense for investors to sell part of their holdings in the open market. Our rating of ACCEPT THE OFFER when pre-conditions are met remains unchanged.

Source: OCBC Research - 24 Mar 2016