Friday 23 March 2012

Neptune Orient Lines

OCBC on 22 Mar 2012

The Shanghai (Export) Containerised Freight Index (SCFI) climbed 5% higher WoW in the week ended 16 Mar 2012. The increase in SCFI was driven by shipping liners’ success in getting most of the previously announced US$300/FEU hike in transpacific shipping rates. However, bunker fuel prices have averaged 8% higher QoQ thus far in 2012. Furthermore, since new deliveries of vessels are expected to increase shipping capacity this year, shipping liners’ collective discipline in managing the oversupply is key to the profitability of the entire container shipping industry. We pared Neptune Orient Lines’ (NOL) FY12 net loss estimate to US$136m, from the previous US$281m, after the latest hike in transpacific shipping rates. But we maintain our fair value estimate of S$1.38/share and HOLD rating on NOL.

Another round of successful rate hikes
The Shanghai (Export) Containerised Freight Index (SCFI) climbed 5% higher WoW in the week ended 16 Mar 2012. The increase in SCFI was driven by increases of US$239/FEU (40-foot equivalent unit) in Shanghai to U.S. west coast and US$222/FEU in Shanghai to U.S. east coast shipping rates. The general rate increase (GRI) in transpacific shipping rates indicates shipping liners have been successful in getting most of the previously announced US$300/FEU rate hike that happened on 15 Mar 2012. Going forward, shipping liners are planning another US$400/FEU hike to transpacific shipping rates on 15 Apr 2012.

Near record high bunker prices go higher
Bloomberg’s 380 Centistoke Bunker Fuel Spot Price Singapore Index (BUNKSI38), a proxy for bunker fuel prices, has been unrelenting and moved even higher since our last report on 3 Mar 2012. Thus far in 2012, BUNKSI38 has averaged 732.6, or 8% higher QoQ. In comparison, the BUNKSI38 only averaged 679.0 in 3Q08, when bunker fuel prices hit an all-time peak of 764.5 in Jul 2008 but quickly fell along with the global financial crisis in 2008.

New deliveries may cause overcapacity
According to the SCFI, Asia-Europe freight rates have slid 2% since the last round of successful GRI. While a 2% drop is typically insignificant, it prompts doubts on 1) whether the GRI recorded YTD is sustainable and 2) the likelihood of further GRI in the coming months. Since new deliveries of vessels are expected to increase shipping capacity this year, shipping liners’ collective discipline in managing the oversupply is key to the profitability of the entire industry.

Maintain HOLD
We pared Neptune Orient Lines’ (NOL) FY12 net loss estimate to US$136m, from the previous US$281m, after the GRI in transpacific rates. However, we had previously raised our fair value estimate of NOL to S$1.38/share to account for the shipping rate hikes. Thus, we maintain our fair value estimate and HOLD rating on NOL.

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