Neptune Orient Lines

OCBC on 30 Apr 2012

The Shanghai (Export) Containerised Freight Index (SCFI) climbed 4% WoW in the week ended 27 Apr 2012. Shanghai to Europe freight rates gained 11% WoW, while Shanghai to Mediterranean rose 13% WoW, ahead of major shipping liners’ announced general rate increase in Asia-Europe freight rates on 1 May 2012. Neptune Orient Lines’ (NOL) share price has fallen 17% from its recent high of S$1.45/share on 3 Apr 2012 but the correction does not seem warranted. The SCFI is currently 43% higher than this time last year and shipping liners, including NOL, are profitable at current freight rates. Although there are concerns over increasing container shipping capacity, shipping liners seem to have learnt their lesson and are now using slow steaming to manage shipping capacity and refraining from price wars. We upgrade our rating on NOL to BUY and maintain our fair value estimate of S$1.38/share.

Another hike in Asia-Europe freight rates
The Shanghai (Export) Containerised Freight Index (SCFI) climbed 4% WoW in the week ended 27 Apr 2012, ahead of major shipping liners’ announced general rate increase of ~US$400/TEU in Asia-Europe freight rates on 1 May 2012. Shanghai to Europe freight rates gained US$180/TEU, or up 11% WoW, while Shanghai to Mediterranean rose US$230/TEU, or +13% WoW.

Disconnect between NOL’s share price and freight rates
Neptune Orient Lines’ (NOL) share price has fallen 17% from its recent high of S$1.45/share on 3 Apr 2012, along with the weak broad market sentiments. The correction in NOL’s share price does not seem warranted. The SCFI is currently 43% higher than this time last year and much of this increase can be attributed to the more than doubling of Shanghai to Europe freight rates. In addition, transpacific freight rates are also significantly higher than a year ago.

Liners’ discipline should alleviate overcapacity concerns
According to Alphaliner, 455,000 TEUs have been added to the global container shipping capacity, while 93,500 TEUs have been scrapped YTD. For 2012, Alphaliner expects a total of 1,388,000 TEUs of new capacity vs. the scrapping of 200,000 TEUs. Lost amidst the concerns over increasing capacity is the fact that shipping liners, including NOL, are profitable at current freight rates, which should be reflected in their 2Q12 earnings. Shipping liners seem to have learnt their lesson after collectively losing at least US$6b in 2011 and are now using slow steaming to manage shipping capacity and refraining from price wars. It is especially encouraging to hear market share leader Maersk Line publicly saying it is now focused on restoring profitability.

Maintain fair value but upgrade to BUY
After NOL’s share price has been sold down along with the broader market despite increasing freight rates, we upgrade our rating on NOL to BUY and maintain our fair value estimate of S$1.38/share.