Gloomy outlook in container shipping

OCBC - fair value of $1.02

Neptune Orient Lines: Rough waters

NOL's container shipping operating performance in Period 9. Neptune Orient Lines (NOL) this week announced its container shipping operating performance for Period 9 (four weeks from 27 Aug 2011 to 23 Sep 2011). Period 9 volumes increased 5.4% YoY to 229,300 forty-foot equivalent unit (FEU) but average revenue per FEU (ARPF) fell to US$2,501/FEU, which represents a 19.4% YoY or a 2.3% MoM drop. Year-to-date, volumes are up 7.7% to 2.16m FEU but ARPF fell 8.5% to US$2,799.

Container shipping demand is soft. Major retailers are usually able to predict their shipping requirement for the upcoming festive sales by this time of the year. But this year, shipping customers are holding back on shipments due to uncertain economic conditions and little concern of finding shipping capacity. Although this could result in last-minute orders later this year, NOL management acknowledged that container shipping may lose out to air freight if orders come in too late. In another sign of the market's tentativeness, the Transpacific Stabilisation Agreement (TSA), a group of 15 container shipping lines, have delayed announcing targets for next year's rates on Asia-U.S. trade lanes. This is a result of inconsistent economic indicators and customers unwilling to commit to orders.

Coupled with overcapacity, container shipping is seeing freight rates falling. According to The Baltic and International Maritime Council (BIMCO), container shipping capacity has increased 6.5% YTD, as 483,000 FEU of capacity were delivered. The latest deliveries have resulted in total container shipping capacity of more than 7.5m FEU. Meanwhile, scrapping of vessels has only seen 15,258 FEU taken off the supply line, especially since the global fleet is rather young. For the whole of 2011, container shipping capacity is expected to outpace demand growth by 2ppt. The increase in container shipping capacity this year has depressed freight rates. And since shipping demand has failed to take off, shipping lines around the world will have to lay up vessels in the near future so as to limit container shipping capacity.

Retain fair value of $1.02 and upgrade to HOLD. Given the gloomy outlook in container shipping, we retain our lower-than-consensus fair value estimate of NOL at $1.02 per share. NOL's share price has continued falling since our last report and is now only 9% away from our fair value estimate. Thus, we upgrade NOL to HOLD. (Eric Teo)