Neptune Orient Lines

Kim Eng on 18 Oct 2012

Expect 3Q2012 back in black. We expect NOL to record its first quarterly net profit when it reports results on 25 Oct, after posting six consecutive quarters of losses. We believe this will be a positive catalyst for the beaten-down stock and will mark a defining quarter in NOL’s recovery out of the container shipping slump. We expect NOL to benefit from 3Q’s freight rate recovery to post a net profit in the region of USD50m, building on its liner operating profit posted in 2Q2012. We maintain our BUY recommendation on NOL as a proxy to the global economic recovery, and maintain our Target Price at SGD1.35, pegged to 1.2x 2013 P/BV.

Watching its freight. NOL’s average revenue / FEU would be a key metric to watch, as it represents its market strength relative to the China Containerised Freight Index (CCFI). NOL’s average freight is better correlated to movements of a one-month lag of the CCFI, and the increase of ~10% QoQ reported for 3Q2012 forms our basis of the improved freight forecasts for NOL. 3Q usually represents a seasonal peak in freight rates as holiday-season shipments move into full swing.

Further upside could emerge from HQ sale. We also estimate that the impending sale of the NOL Building could net NOL one-time gains of USD100-200m. While we prefer to exclude this from our forecasts for now, the potential upside of 4-9% to NOL’s NAV could provide a further jolt to NOL’s share price. The timing could be right for NOL to reap gains from a non-core asset and use the cash proceeds to strengthen its balance sheet.

NOL’s time to shine – reiterate BUY. While 3Q could be a peak in terms of freight rates, we see this as a defining quarter for NOL’s recovery out of the container shipping slump. We maintain that NOL’s strength in the Transpacific trade, leaner structure, with more fuel- efficient vessels coming on-stream, puts it in good stead to benefit from the recovery. We advise investors to make an early entry to benefit from the industry up-cycle – reiterate BUY, Target Price: SGD1.35.