Neptune Orient Lines

Kim Eng on 28 June 2012

Freight and fuel show signs of improvement. Leading indicators for freight rates and fuel prices have given us cause for optimism about Neptune Orient Lines’ (NOL) fortunes in 2Q12. The China Containerized Freight Index (CCFI) has risen 30% QoQ during the quarter with a corresponding drop in bunker prices by almost 10% QoQ.

They signal a scenario that, in our view, would make things more manageable in the near term for the world’s seventh-largest container shipping line by capacity. It might even achieve a breakeven for the remaining three quarters of the year after a poor 1Q12.

Rough seas or safe landing ahead? The uncertain economic outlook has put a wedge between analyst opinions. While the main concerns are centred on Europe, fears of a global fallout continue to cloud visibility on freight rate assumptions. Our assumptions of plateauing rates following the surge in 2Q12 are guided by recent reports of only a partial success in implementing peak season surcharges.

Capacity glut still an overhang. Based on industry forecasts, overcapacity looks set to last until the end of 2013. With capacity increases of almost 10% each for 2012 and 2013, and the world economy still in an uncertain state, it would be difficult to justify a bullish outlook for the container shipping industry until the capacity situation moderates in 2014.

Narrow forecasted loss, but maintain SELL. Improved top-line drivers of higher freight and lower fuel cost assumptions will help to stabilise NOL’s prospects in the near term. However, there remains the scourge of overcapacity, not to mention our skepticism about the industry’s ability to continue relying on liner cooperation to sustain a freight rate recovery. Our valuation remains pegged at 0.8x FY12F P/BV. Maintain SELL.