Neptune Orient Lines

Kim Eng on 23 Feb 2012

4Q11 results weaker than expected. Excluding impairment charges of US$19.5m on assets (vessels) classified as held-for-sale and US$10.0m forex losses, Neptune Orient Lines’ (NOL) 4Q11 results still fell short of our expectations. Net loss of US$320.4m was also significantly wider than the 3Q11 loss of US$91.1m, largely due to persistently high fuel costs and lower freight rates. We lower our target price to $1.20 and downgrade the stock to Sell.

Liner shipping business disappointed. Its liner business unit achieved 4Q11 revenue of US$2.0b (-16% YoY), mainly arising from the 15% YoY decline in average revenue per FEU to US$2,342. On a full-year basis, cost of sales per FEU increased 2% on the back of a 33% rise in bunker prices. This resulted in a sharp contraction of the liner’s core EBIT margin by 11.5ppt to -5.6% in FY11. Looking ahead, management has set an aggressive US$500m cost-savings goal to improve its competitiveness amid challenging industry conditions.

Logistics was the saving grace. Logistics reported steady revenue of US$0.39b in 4Q11 (+2.6% YoY), driven by buoyant demand for rail and land-based logistics services from automotive and retail customers. However, the higher earnings were partly offset by the spike in operating and technology costs to support growth and narrower margins in International Logistics.

Increasingly stretched balance sheet. To fully finance the group’s capex for all its 32 newbuild vessels, we estimate that net gearing would creep up to 1.2x in FY12F. Given its increasingly stretched balance sheet, we see a potential equity-raising risk especially with the mounting cash losses.

Valuation not justified following strong run-up. We raised our FY12 loss forecasts to US$160.3m after factoring in higher bunker costs assumption. Accordingly, our target price has been reduced to $1.20, still based on mid-cycle valuation of 1.0x forward P/BV. While recent freight rates have shown initial signs of recovery, we think the share price has already run ahead of its fundamentals.