Neptune Orient Lines

Kim Eng on 11 Apr 2012

Perpetuals postponed. Just three days after announcing on 27 March 2012 a proposal to issue SGD-denominated perpetual securities (or perps), Neptune Orient Lines (NOL) backpedalled. It cited unfavourable market conditions as the reason for postponing the issuance, which was intended to raise funds for general corporate purposes and investments, possibly in the logistics sector. If the need for capital remains, we think NOL will have little choice but to hold a rights issue.

Need to shore up balance sheet. We had highlighted in our recent results review that we are not ruling out the possibility of equity capitalraising by NOL, considering its increasingly stretched balance sheet and financial losses. The announcement of the perps had reaffirmed our assessment of the need for funds.

Debt market freeze. Bloomberg had reported last month that 13 of the world’s largest 19 shipping banks have stopped new lending to the industry in view of the vessel glut plaguing the sector. NOL, with its FY2012 balance sheet estimated to be at 1.2x net gearing after funding its 32 newbuilds, will unlikely be able to tap efficiently on these markets.

Shipping industry outlook still bleak. Although container freight appears to be bottoming out, bunker costs have continued to climb up and sentiment towards the shipping industry remains poor overall. Perhaps this was why NOL’s perp offering saw lukewarm interest. In contrast, Genting Singapore is preparing a second tranche of perpetual securities to raise S$500m after the success of its first offering of S$1.8b. The new tranche may be raised by another S$200m depending on demand, and proves that the market for perps is still strong, albeit heavily dependent on the type of company and the sector it is in.

Few options left, reiterate Sell. The perp postponement and frozen debt market all serve to heighten the risk of NOL undertaking a rights issue. Against the backdrop of poor industry sentiment, we believe a call for new capital injection would further depress its share price. Reiterate Sell with the target price unchanged at $1.20.