Neptune Orient Lines

OCBC on 10 May 2012

Neptune Orient Lines (NOL) reported a net loss of US$254m in 1Q12. Logistic revenue grew 7% YoY to US$394m but was unable to offset the 4% fall in Liner revenue to US$2.0b. Group revenue slipped 3% YoY to US$2.4b. Liner revenue shrank despite a volume gain of 4% YoY because average revenue per 40-foot unit (FEU) came in at 7% lower. Management said NOL’s Efficiency Leadership Programme is on track to achieve US$500m of cost savings in 2012. Freight rates have so far in 2Q12 averaged 33% higher QoQ and current rates should see NOL return to profitability in 2Q12. And with NOL expected to turn profitable, we maintain our fair value estimate of S$1.38/share and BUY rating on NOL.

Still loss making
Neptune Orient Lines (NOL) released its 1Q12 results and remained in the red with a net loss of US$254m. Despite a 7% YoY growth in Logistic revenue to US$394m, group revenue in 1Q12 slipped 3% YoY to US$2.4b. Liner revenue fell 4% YoY to US$2.0b because average revenue per 40-foot unit (FEU) came in 7% lower YoY at US$2,420, which more than offset its volume gain of 4%.

Efficiency leadership programme on track
At its 4Q11 results briefing, management revealed its plans to achieve US$500m of cost savings in 2012 by improving operational efficiencies under its Efficiency Leadership Programme (ELP). Management said the ELP is on track to achieve its objectives and the programme has helped to reduce total bunker consumption by ~10% even though volume increased by 4% in 1Q12. However, cost of sales per FEU (COS/FEU) in 1Q12 increased by 3% with bunker prices 31% higher YoY. Without the higher bunker price, COS/FEU should have eased 3% lower.

NOL should turn profitable after rate hikes
Plagued by weak freight rates and high bunker prices, 1Q12 has proved to be very challenging for NOL. However, The Shanghai (Export) Containerised Freight Index has so far in 2Q12 averaged 33% higher QoQ. In addition, the transpacific, Asia-Europe and intra-Asia shipping lanes are also averaging 24%, 69% and 36% higher QoQ respectively. Furthermore, Bloomberg’s 380 Centistoke Bunker Fuel Spot Price Singapore Index is currently averaging 2% lower QoQ, indicating that the previously unrelenting rise in bunker fuel prices has finally ended.

Maintain BUY
With NOL expected to turn profitable in 2Q12, we maintain our fair value estimate of S$1.38/share and BUY rating on NOL.