We downgrade Neptune Orient Lines’s (NOL) to HOLD in light of weaker than expected freight rates and poorer industry-wide action on capacity management. According to the SCFI, average freight rates have declined by more than 13% QoQ as compared to an increase over the same period last year. This downward trend could reduce the impact of the upcoming general rate hike on 1 Jul – enacted by the Transpacific Stabilisation Agreement – unless greater effort on reducing capacity is undertaken by carriers ahead of the peak-season. While the low-fuel cost environment and ongoing cost-saving initiatives will benefit NOL, we lower our forecasts in anticipation of a slightly disappointing peak season. Lowering our P/B peg to 1.1x (1.3x previously), our fair value estimate falls to S$1.17 (S$1.38 previously).
Freight rates take a tumble
According to the Shanghai Containerised Freight Index (SCFI), average freight rates for 2Q13 have fallen by more than 13% QoQ with the decline more pronounced in certain sectors (mainly Europe and South America: -35.4% QoQ % -34.5% QoQ each). The sole sector that registered marginal improvements was Intra-Asia (+4.1% QoQ). This was in stark contrast to the figures over the same period last year where overall average freight rates improved by 31.2% QoQ as carriers collectively enforced capacity cuts and rate hikes.
Jul 1 boost may be temporary
Members of the Transpacific Stabilisation Agreement (TSA) – of which Neptune Orient Lines (NOL) belongs to – have agreed to hike rates by US$400/FEU for the transpacific route and by US$600/FEU for all other destinations, effective 1 Jul. This increase will hopefully help to boost rates ahead of the peak-shipping season. However, carriers continue to be plagued by over-capacity issues and the impact from this increase could only be temporary in nature.
Efforts to control capacity wavering?
Aside from the substantial capacity adjustments back in late 2011, efforts to control capacity since then have waned despite initiatives by alliances to reduce routes, and this has led to a negation of general rate hikes implemented in Jan and Apr this year. Although there has been the recent formulation of a P3 alliance between the world’s three largest container liners (Maersk, CMA CGM and Mediterranean Shipping Company), it will only commence from 2Q14 and impact mainly the Asia-Europe trade route (of which NOL has ~15% top-line exposure).
Reduce forecasts and valuation
While the low-fuel cost environment and ongoing cost-saving initiatives will benefit NOL, we opt to lower our forecasts in light of weaker freight rates and anticipation of a slightly disappointing peak season. Lowering our P/B peg to 1.1x (1.3x previously), our fair value estimate falls to S$1.17 (S$1.38 previously). Downgrade to HOLD.
According to the Shanghai Containerised Freight Index (SCFI), average freight rates for 2Q13 have fallen by more than 13% QoQ with the decline more pronounced in certain sectors (mainly Europe and South America: -35.4% QoQ % -34.5% QoQ each). The sole sector that registered marginal improvements was Intra-Asia (+4.1% QoQ). This was in stark contrast to the figures over the same period last year where overall average freight rates improved by 31.2% QoQ as carriers collectively enforced capacity cuts and rate hikes.
Jul 1 boost may be temporary
Members of the Transpacific Stabilisation Agreement (TSA) – of which Neptune Orient Lines (NOL) belongs to – have agreed to hike rates by US$400/FEU for the transpacific route and by US$600/FEU for all other destinations, effective 1 Jul. This increase will hopefully help to boost rates ahead of the peak-shipping season. However, carriers continue to be plagued by over-capacity issues and the impact from this increase could only be temporary in nature.
Efforts to control capacity wavering?
Aside from the substantial capacity adjustments back in late 2011, efforts to control capacity since then have waned despite initiatives by alliances to reduce routes, and this has led to a negation of general rate hikes implemented in Jan and Apr this year. Although there has been the recent formulation of a P3 alliance between the world’s three largest container liners (Maersk, CMA CGM and Mediterranean Shipping Company), it will only commence from 2Q14 and impact mainly the Asia-Europe trade route (of which NOL has ~15% top-line exposure).
Reduce forecasts and valuation
While the low-fuel cost environment and ongoing cost-saving initiatives will benefit NOL, we opt to lower our forecasts in light of weaker freight rates and anticipation of a slightly disappointing peak season. Lowering our P/B peg to 1.1x (1.3x previously), our fair value estimate falls to S$1.17 (S$1.38 previously). Downgrade to HOLD.
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