NOL 4Q11 revenue fell 13% YoY to US$2.4b,

Fair value of S1.15


Nightmare Of A Quarter
• Size of 4Q11 net loss surprised street
• 1Q12 seems equally challenging
• Full rate hike is unlikely

Magnitude of net loss took street by surprise
Neptune Orient Lines (NOL) turned in a net loss of US$320m in 4Q11, which resulted in a FY11 net loss of US$478m. 4Q11 revenue fell 13% YoY to US$2.4b, while FY11 revenue eased 2% YoY to US$9.2b. The magnitude of NOL’s net loss in 4Q11 is likely to take the street, which was expecting net losses of US$118m and US$275m for 4Q11 and FY11 respectively, by complete surprise. Furthermore, NOL’s net loss in 4Q11 was even higher than any single quarter during the sub-prime crisis back in 2008/09.

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1Q12 seems equally challenging
During the month leading to the Chinese New Year, freight rates (SHSPSCFI Index) saw a 15% bounce from the low in mid-Dec 2011, as customers rushed orders before factories in China close for the festive season. The SHSPSCFI has since slid lower for three weeks in a row. Although the SHSPSCFI has averaged 7% higher thus far in 1Q12, bunker prices (BUNKSI38 Index) have more than kept pace by climbing 8%.

Full rate hike is unlikely
Much will now depend on how successful liners are in rate hikes for both Asia-Europe and transpacific trade lanes. At the results briefing, NOL’s management sounded between hopeful and confident of successfully raising freight rates, starting next month. However, overcapacity should mean shipping liners are unlikely to get the full rate hikes they are seeking, short of a mass idling of capacity by the entire shipping community.

Reiterate SELL with new fair value of S1.15
Given the possibility of shipping liners successfully raising freight rates, we increase our fair value estimate of NOL to S$1.15/share, based on a 0.9x P/B multiple or half a standard deviation below historical average. However, we reiterate our SELL rating on NOL after a dreadful 4Q11 and an equally challenging outlook.

Target price: S$1.20


Downgrade to Sell. Neptune Orient Lines’ (NOL) 4Q11 results came in weaker than expected even after excluding impairment charges of US$19.5m on assets classified as held-for-sale (ie, vessels) and a forex loss of US$10.0m. Net loss of US$320.4m for the quarter was also significantly higher than the previous quarter’s at US$91.1m, largely due to persistently high fuel costs and lower freight rates. We lower our target price to $1.20 and downgrade the stock to Sell.

Liner shipping disappointed. NOL’s liner business unit achieved 4Q11 revenue of US$2.0b, representing a 16% YoY decline. This came on the heels of a 15% YoY drop in average revenue per FEU to US$2,342. On a full-year basis, cost of sales per FEU inched up by 2% following a 33% jump in bunker prices. As a result, EBIT margin for the liner business unit contracted by a sharp 11.5ppt to -5.6% in FY11. Management has set an aggressive goal of US$500m in cost savings to improve the unit’s competitiveness to tackle challenges in the industry.

Logistics the saving grace. The logistics division reported steady revenue of US$0.39b in 4Q11 (+2.6% YoY), driven by buoyant demand for rail and land-based logistics services from automotive and retail customers. However, the higher earnings were partly offset by the spike in operating and technology costs to support growth and the narrower margins in international logistics.

Balance sheet increasingly stretched. To fund the capex for its 32 newbuild vessels, we estimate that NOL’s net gearing would creep up to 1.2x in FY12F. Given its increasingly stretched balance sheet and faced with mounting cash losses, we do not rule out the possibility of equity capital raising by NOL.

Valuation unjustified following strong run-up. We raise our FY12F loss forecast to US$160.3m to factor in our assumption of higher bunker costs. Our target price thus falls to $1.20 (previously $1.35), still based on mid-cycle valuation of 1.0x forward P/BV. While recent freight rates have shown initial signs of recovery, we think the share price has already run ahead of its fundamentals. Downgrade to Sell.

52 Weeks Range 0.980 - 2.130

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