Neptune Orient Lines

Kim Eng on 10 May 2012

Blow-out 1Q12 Net loss. Neptune Orient Lines (NOL) reported a 1Q2012 Net Loss of USD 253.6 mil, blowing away our already pessimistic FY2012 (read: full year) net loss estimates of USD 160 mil, not to mention consensus estimates of a FY2012 USD 31 mil loss. We maintain our SELL call on NOL and reduce our Target Price further to SGD 0.85 based on 0.8x forward P/B. The bleak outlook in the shipping industry, coupled with global economic uncertainties will likely push a firm recovery for NOL to 2014.

Fuel & freight again NOL’s undoing. NOL’s 1Q2012 Liner volume grew by 4% YoY, but cost efficiencies were offset by lower freight of 7% YoY (Figure 1) and higher bunker costs (Figure 2). Its Logistics arm reported a 7% increase in revenue, but were also hit by an operating profit decline of 38% to USD 13 mil.
Group Cost Savings programme drowned out. In February this year, NOL had announced an ambitious plan for a USD 500 mil cost-cutting programme to stem the flow of red ink. It reported that it was still on track to achieve this full-year target through savings on bunker utilization (reduction of 10% YoY despite volume increasing 4%) and other improved efficiencies. Unfortunately this commendable effort was drowned out by the negative fundamentals from the business.

Negative cashflow. NOL posted a negative USD 132 mil net cashflow from operations for 1Q12, which had to be covered by USD 200 mil in net borrowings. We grow increasingly concerned that the mounting losses will necessitate NOL taking on a strenuous debt-load which will further erode profits through the increased interest burden.

Reiterate SELL, TP further reduced. With no end in sight to the bad news for NOL, we adjust our profit forecasts further downward and cut our TP further to SGD 0.85, based on 0.8x P/B, approximately 1 standard deviation below its historical mean. The perfect storm of global economic uncertainties, mixed with persistently high bunker costs and overcapacity concerns have seemingly ended NOL’s hope of a quick recovery from the red ink posted in FY2011.