Thursday, 21 August 2014

Neptune Orient Lines

Kim Eng 20 Aug 2014

  • NOL selling logistics unit for USD750-900m, according to Reuters. 
  • If so, net gearing could drop below 1.8x from 2.2x. Likely use of proceeds: 1) pay down debt; 2) reinvest in new vessels; and 3) M&As. Special DPS possible, but debt paydown more prudent.
  • Maintain HOLD and TP of SGD1.05, based on 1.0x FY15E P/BV.
What’s New
According to a Reuters report, NOL is hoping to sell its logistics unit for USD750-900m, valuing it at 10-12x EBITDA. NOL said it would continue to evaluate all options to improve its strategic positioning and business performances (sales, IPOs etc.). However, it cautions that these considerations are preliminary and exploratory, with no assurance of firm conclusions.

What’s Our View
APL Logistics has been a stable earnings contributor, though its performance is often less prominent than that of NOL’s container-shipping arm. A sale could unlock value within the group, with investors reacting positively, in our view. The target valuation translates to USD0.29-35/share.
In an all-cash sale, NOL’s net gearing could fall below 1.8x from 2.2x in Jun 2014. It could use the proceeds to: 1) pay down its high debt; 2) reinvest in new vessels for longer-term growth (no outstanding vessels for delivery); and 3) M&As. NOL could also return part of the proceeds to shareholders as special dividends, though we doubt these would be significant. A more prudent move would be to reduce debt. Financials for this unit are attached for your quick reference.

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