We believe the liner industry is likely to be weak in 2015; and near-term headwinds are expected to persist for Neptune Orient Lines Limited (NOL) for various reasons, including depressed rates on overcapacity issue. With no recovery expected in the near-term, we think selling its logistics business (APLL), which has been the only positive contributor to bottom-line over the past three years, has a net negative impact as we estimate the loss of earnings to more than offset savings in interest expenses. However, in the longer-term (i.e. at least until FY16 onwards) when the shipping industry starts to experience recovery, with the proceeds from the proposed divestment, we think NOL will then be well-poised to ride the growth cycle on stronger balance sheet from reduced gearing. We have yet to factor the financial impact from the divestment in our forecasts but if we do, based on a higher FY15F NBV and 0.80x P/B (discounted for near-term weakness and slower longer-term recovery without APLL), we derive a FV of S$1.15. However, with the divestment still pending approvals, maintain HOLD on NOL as our FV remains unchanged at S$1.01 on a blended basis.
Industry weakness likely to persist in 2015
We believe the liner industry is likely to be weak in 2015; and near-term headwinds are expected to persist for Neptune Orient Lines Limited (NOL) for various reasons: 1) lower growth in world trade volume as IMF cut its forecasts by 1.1 ppt to 3.8%, 2) overcapacity likely to continue in 2015 on 7.8% growth in world cellular fleet in 2015, which leads to, 3) depressed freight rates since container shipping demand will be lower than capacity growth, and lastly, 4) the U.S. West Coast (USWC) labour negotiations that started in May-14 were only completed on 20-Feb-15 for a new five-year labour contract; and as a result, we expect the USWC port to take at least six to eight weeks to work through the large backlog of containers built up.
Well-poised for recovery in the longer-term
With no recovery expected in the near-term, we think selling its logistics business (APLL), which has been the only positive contributor to bottom-line over the past three years, has a net negative impact as we estimate the loss of earnings to more than offset savings in interest expenses. However, in the longer-term (i.e. at least until FY16 onwards) when the shipping industry starts to experience recovery, with the proceeds from the proposed divestment, we think NOL will then be well-poised to ride the growth cycle on stronger balance sheet from reduced gearing. With IMF forecasting world trade volume to grow by 5.3% in 2016 and cellular fleet projected to grow by 5.3% (Alphaliner’s forecasts) as well, the data gives a good indication that shipping industry is likely to gradually recover from 2016 onwards. Furthermore, NOL now has a modernised fleet, which are fuel-efficient after its US$4b fleet renewal programme and cost savings are already showing over the past few quarters.
Blended FV on pending divestment approvals
We have yet to factor the financial impact from the divestment in our forecasts but if we do, based on a higher FY15F NBV and 0.80x P/B (discounted for near-term weakness and slower longer-term recovery without APLL), we derive a FV of S$1.15. However, with the divestment still pending approvals, maintain HOLD on NOL as our FV remains unchanged at S$1.01 on a blended basis
We believe the liner industry is likely to be weak in 2015; and near-term headwinds are expected to persist for Neptune Orient Lines Limited (NOL) for various reasons: 1) lower growth in world trade volume as IMF cut its forecasts by 1.1 ppt to 3.8%, 2) overcapacity likely to continue in 2015 on 7.8% growth in world cellular fleet in 2015, which leads to, 3) depressed freight rates since container shipping demand will be lower than capacity growth, and lastly, 4) the U.S. West Coast (USWC) labour negotiations that started in May-14 were only completed on 20-Feb-15 for a new five-year labour contract; and as a result, we expect the USWC port to take at least six to eight weeks to work through the large backlog of containers built up.
Well-poised for recovery in the longer-term
With no recovery expected in the near-term, we think selling its logistics business (APLL), which has been the only positive contributor to bottom-line over the past three years, has a net negative impact as we estimate the loss of earnings to more than offset savings in interest expenses. However, in the longer-term (i.e. at least until FY16 onwards) when the shipping industry starts to experience recovery, with the proceeds from the proposed divestment, we think NOL will then be well-poised to ride the growth cycle on stronger balance sheet from reduced gearing. With IMF forecasting world trade volume to grow by 5.3% in 2016 and cellular fleet projected to grow by 5.3% (Alphaliner’s forecasts) as well, the data gives a good indication that shipping industry is likely to gradually recover from 2016 onwards. Furthermore, NOL now has a modernised fleet, which are fuel-efficient after its US$4b fleet renewal programme and cost savings are already showing over the past few quarters.
Blended FV on pending divestment approvals
We have yet to factor the financial impact from the divestment in our forecasts but if we do, based on a higher FY15F NBV and 0.80x P/B (discounted for near-term weakness and slower longer-term recovery without APLL), we derive a FV of S$1.15. However, with the divestment still pending approvals, maintain HOLD on NOL as our FV remains unchanged at S$1.01 on a blended basis
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