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Analysts: Dipping Freight Rates And Lack Of Catalyst For NOL
Aspire, Hot Picks | 27 May 2015
By: Lim Si Jie
Articles (169) Profile

Analysts' updates on Neptune Orient Lines Limited as at 26/05/2015

While Neptune Orient Lines (NOL) released their disappointing 1Q15 results, the other liners seem to be enjoying the fall in bunker fuel prices. NOL’s 1Q15 results were mainly because of uncertain volume and rates. To make things worse, the competitive environment is threatening NOL’s global liner status.

Falling Revenue From Cost Cutting

NOL’s 13 percent Year-on-Year (YoY) revenue decline was mainly due to planned capacity cuts, void sailings and muted freight rates. Fortunately, disciplined cost management and operational efficiency lowered NOL’s 1Q15 net loss by 71 percent to US$36 million.

The liner arm delivered core Earnings Before Interest and Tax (EDIT) of US$13 million. However, NOL made an overall loss at the pre-tax profit level because of the liner division’s loss of US$37 million.

Dipping Freight Rates Trend

Bigger and more efficient ships are the only way to ensure profitability amidst the structural decline in freight rates. Though NOL is reducing costs by returning expensive charters, it is also conceding market share.

With an improved balance sheet following the divestment of the logistics business, NOL could position for new orders in future but risks being late to the party.

Transpacific Freight Rates

With 42 percent exposure to transpacific routes, NOL’s key catalyst to see recovery in the liner business is a sustained increase in freight rates. Due to weak world trade volume growth forecasted by International Monetary Fund (IMF), and higher capacity growth forecasted by Alphaliner, the likelihood of any near-term recovery of the liner industry is still low.

Furthermore, larger vessels are expected to be delivered this year to serve the Asia-Europe route, adding pressure on freight rates on the transpacific routes. Recovery in transpacific freight rates and liner performance, will come only in FY16 and not in FY15.

Competitors Compete For Market Share

The near term outlook does not look very bright for NOL. Competitor liners now seem to be passing most of their fuel cost savings to shippers in a quest for market share, leading to its five-year low Shanghai Containerised Freight Index (SCFI).

Even Maersk Line has recently come out strongly in favour of making up for market share loss, a sign that does not bode well for the market, and especially NOL. The previous consensus were too optimistic to believe that liners will be rational and would benefit from lower oil prices.

With NOL having outperformed the STI by about 15 percent since the previous upgrade from major brokerages, and no more catalysts visible, the common consensus among analysts is a HOLD rating on NOL.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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