Neptune Orient Lines's (NOL) 3Q13 results confirmed our expectations of an absent peak season. Weaker freight rates caused a larger-than-expected drop-off in revenue (-10.4% to US$2.06b) and negated cost savings from its efficiency initiatives and efforts to manage capacity (headhaul utilisation rates remained at ~90%). As a result, 3Q13 core EBIT declined by 72.1% YoY to US$18.0m. Looking ahead, 4Q13 is likely to remain weak given the historical tendency for rates to fall QoQ (average drop of 8.8% for past three years). In addition, collective industry action remains far from ideal. With a lacklustre medium-term outlook over freight rates, we adjusting our projections downwards and our FY14F PATMI falls to a US$22m loss (+US$64m previously). Maintain our SELL on NOL with an unchanged fair value estimate of S$0.95.
No 3Q13 peak season
Neptune Orient Lines's (NOL) 3Q13 results confirmed our expectations of an absent peak season. Weaker freight rates caused a larger-than-expected drop-off in revenue (-10.4% to US$2.06b) and negated cost savings from its efficiency initiatives and efforts to manage capacity (headhaul utilisation rates remained at ~90%). As a result, 3Q13 core EBIT declined by 72.1% YoY to US$18.0m.
Loss-making 4Q to close out the year?
4Q freight rates for NOL have fallen by an average of 8.8% QoQ for the past three years so FY13 should prove no exception. In addition, with demand typically tapering off in 4Q, the ability of liners to implement rate hikes should subside as well. Therefore, despite the rhetoric of the larger liners insisting on another round of rate hikes for Nov, it is our view that actual enforcement will be lacking. Substantial collective action remains wanting – especially with liners clinging on to the notion of protecting their respective market shares – and so we expect freight rates to stay soft.
2014 turnaround optimistic at best
The unwillingness of the major liners to cut capacity further and idle ships to address dropping rates pose significant problems for a 2014 turnaround. Even NOL’s own projections back in 2Q13 show a demand-supply gap till end-2014. With the addition of larger ships and pre-crisis ordered vessels coming on board, the industry will continue to suffer from its bad decisions well into 2015.
No catalysts ahead; maintain SELL
With a lacklustre medium-term outlook over freight rates, we adjusting our projections downwards and our FY14F PATMI falls to a US$22m loss (+US$64m previously). Maintain our SELL on NOL with an unchanged fair value estimate of S$0.95.
Neptune Orient Lines's (NOL) 3Q13 results confirmed our expectations of an absent peak season. Weaker freight rates caused a larger-than-expected drop-off in revenue (-10.4% to US$2.06b) and negated cost savings from its efficiency initiatives and efforts to manage capacity (headhaul utilisation rates remained at ~90%). As a result, 3Q13 core EBIT declined by 72.1% YoY to US$18.0m.
Loss-making 4Q to close out the year?
4Q freight rates for NOL have fallen by an average of 8.8% QoQ for the past three years so FY13 should prove no exception. In addition, with demand typically tapering off in 4Q, the ability of liners to implement rate hikes should subside as well. Therefore, despite the rhetoric of the larger liners insisting on another round of rate hikes for Nov, it is our view that actual enforcement will be lacking. Substantial collective action remains wanting – especially with liners clinging on to the notion of protecting their respective market shares – and so we expect freight rates to stay soft.
2014 turnaround optimistic at best
The unwillingness of the major liners to cut capacity further and idle ships to address dropping rates pose significant problems for a 2014 turnaround. Even NOL’s own projections back in 2Q13 show a demand-supply gap till end-2014. With the addition of larger ships and pre-crisis ordered vessels coming on board, the industry will continue to suffer from its bad decisions well into 2015.
No catalysts ahead; maintain SELL
With a lacklustre medium-term outlook over freight rates, we adjusting our projections downwards and our FY14F PATMI falls to a US$22m loss (+US$64m previously). Maintain our SELL on NOL with an unchanged fair value estimate of S$0.95.
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