NOL high fuel prices – profitability hurt

Neptune Orient Lines: Fair value of S$1.02



●Recent rate hikes may not be sustainable
●Intra-Asia freight rates remained flat
●Near record-high bunker fuel prices

Weak demand and oversupply – are rate hikes sustainable?

Since falling to a two-year low of S$0.995 on 21 Nov 2011, the share price of Neptune Orient Lines (NOL) has climbed 20%. A couple of data points support this: 1) The Shanghai Shipping Exchange reported Asia- Europe freight rates jumped 40% in the last two weeks of 2011, and 2) Drewry Shipping Consultants said freight rate from Hong Kong to Los Angeles, in the first week of 2012, climbed 28%. Asia-Europe and transpacific freight rates increased as liners added surcharges to these trade lanes. But it is still uncertain if these shipping surcharges are sustainable, since container shipping is still facing unfavourable demand and supply dynamics.

Freight rates on intra-Asia trade lanes remain flat.
During the final week of 2011, the Shanghai (Export) Containerised Freight Index (SCFI) climbed an impressive 11% WoW. Within SCFI, the Asia-Europe rates jumped 31% while the transpacific rates gained a solid 19%. However, intra-Asia freight rates have largely remained flat, reducing NOL’s overall benefit from the rate hikes. Intra-Asia is NOL’s biggest and fastest growing trade lane by volume. NOL’s respective volume contribution by transpacific, Asia-Europe and intra-Asia were 29%, 17% and 43% in 9M11, compared to 33%, 16% and 39% in 9M10.

Near record-high bunker fuel prices.
In 2011, Bloomberg’s 380 Centistoke Bunker Fuel Spot Price Singapore Index (BUNKSI38) averaged 40% higher than in 2010. Furthermore, every quarter in 2011 saw a higher average BUNKSI38 than the previous. With bunker prices now only 10% off the record-high back in 2008, NOL’s profit margin is likely to remain depressed.

Maintain SELL and fair value of S$1.02.
Apart from near record-high bunker fuel prices, the unfavourable demand and supply dynamics in container shipping do not exude confidence that the recent freight rate hikes are sustainable. Thus, we maintain our SELL