Neptune Orient Lines

OCBC on 7 Sept 2012

The G6 Alliance (of which NOL belongs to) recently pulled the Loop 3 service on the Asia-Europe (AE) route after the carriers cited ‘the forecast lack of improvements’ in the trade lane. This latest development reiterates the softness of the AE route although the more important Transpacific route is still exhibiting encouraging signs with volume picking up and incremental rate increases holding up well. Whether the peak season will provide a much needed boost for carriers remains to be seen but we adjusted our forecasts slightly to account for the recovery in bunker fuel price and potential dip in freight rates in 4Q. The industry remains well aware that managing container shipping capacity is essential for profitability and collective efforts to withdraw service/capacity have been encouraging. Coupled with NOL’s Efficiency Leadership Programme (ELP) showing significant cost savings, we maintain our BUY rating on NOL with an unchanged P/B based fair value estimate of S$1.38/share.

Asia Europe trade route remains weak
The G6 Alliance (of which NOL belongs to) recently pulled the Loop 3 service on the Asia-Europe (AE) route after the carriers cited ‘the forecast lack of improvements’ in the trade lane. This move follows its decision in May to drop plans for a seventh loop service, which it also attributed to weak market conditions. Despite entering the peak season, cargo volumes on the AE trade route are not expected to experience the traditional bump. With Evergreen confirming plans to start loop service on the AE trade route, we could see already weak demand further exacerbated by potential rate cuts.

But Transpacific route still encouraging
Although AE remains soft, the Transpacific route is still exhibiting encouraging signs with volume picking up. Furthermore, the incremental rate increases implemented in Aug have defied market expectations and have held up well. With the trade route typically contributing about 40% of NOL’s liner revenue, we are hopeful that a decent showing could help to cushion the fallout from AE in 3Q.

Lower forecasts slightly on higher fuel and reduced rates
Whether the peak season will provide a much needed boost for carriers remains to be seen but we are leaving our projected 6% QoQ increase in 3Q revenue unchanged. Key risks for NOL will likely come from diminished freight rates and continued recovery in fuel prices. While we are not expecting a drastic decline in freight rates in 4Q, the larger declines in AE and Intra-Asia rates do raise some concerns over the overall climate, and we could potentially see carriers give back their Aug price increases. In addition, Bunker fuel price has been creeping upwards (BUNKSI38 Index was up 7% for Aug), which could further dampen an already weak environment. Adjusting our estimates, FY12F EBITDA falls by 20% to US$95m.

Maintain BUY
Despite the difficult operating environment, we feel that the industry is aware that managing container shipping capacity remains essential for profitability and collective efforts to withdraw service/capacity so far have been encouraging. Coupled with NOL’s Efficiency Leadership Programme (ELP) showing significant cost savings, we maintain our BUY rating on NOL with an unchanged P/B based fair value estimate of S$1.38/share.