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NOL’s Q1 Results: Expected Loss Amidst The Rough Conditions
Tradeable, Tradeable Ideas | 19 May 2014
By: Lim Si Jie
Articles (169) Profile
  1. NOL’s Q1 results showed a continued trend of loss in recent years for NOL.
  2. Despite being the seventh largest carrier in terms of slot capacity, NOL has been unable to match the market share of top leaders in the industry.
  3. Downward falling MACD and broken upward trending RSI and MFI signals an imminent downtrend.

NOL’s Q1 Results
Neptune Orient Lines (NOL) slumped to a $98 million net loss in the first quarter as it continues to suffer from the global overcapacity of container shipping. Container-shipping companies continue to be burdened by the weak freight demand in the global economy.

It is expected that overcapacity would continue to persist for some time before container-shipping companies are able to see the light at the end of the tunnel. There are few signs of a quick recovery in freight rates.

Revenues in the first quarter fell by 4 percent year-on-year to $2.28 billion. The Q1 loss reversed a $76 million profit in the same period in 2013. However, the positive profit in Q1 in 2013 was due to a $200 million one-time gain from the sale of its Singapore headquarters as the company moved to a rented office space this month.

The container-ship owner has been managing expenses and improving operational efficiency, which has so far accumulating $80 million in cost savings over the first three months of this year.

NOL’s Bigger Problem Ahead
Another problem for NOL that is more difficult to address: size and scale. Container line APL is the world’s seventh largest in terms of slot capacity, but this gives it mere a 3.4 percent share of the global market.

By contrast, Maersk and Mediterranean Shipping Co (MSC) have a 14.9 percent and 13.5 percent market share respectively.

Table on NOL's profitability ratios.
Table on NOL’s profitability ratios.

This is supported by the profitability ratios of NOL. All three of NOL’s margins that demonstrate a company’s profitability are in the negative range. What is even more worrying is that the five year averages of all the margins are also in the negative range, albeit by a small value.

Revenue in the first quarter was $2.28 billion. However, with a negative margin, it means that no matter how much revenue NOL can achieve, it would still be making a loss.

Management Effectiveness?

The fact that it took NOL five years to actively seek to reduce expenses despite knowing that NOL is facing the economic downturn head-on is puzzling to investors. Could NOL have done more especially with a management that has such vast experience in this industry?

Table on NOL's management effectiveness ratios.
Table on NOL’s management effectiveness ratios.

It certainly does not reflect well on NOL or its management given that all of the management effectiveness figures are not in the positive range. It is true that management effectiveness cannot be purely judged based on numbers.

As investors, we are not looking at the numbers to judge the management. We are looking for the assurance from the management. However, as of now, I still do not see the assurance that investors are looking for in NOL.

A Negative MACD Coupled With Broken RSI and MFI Uptrend
A technical analysis of NOL's stock chart
A technical analysis of NOL’s stock chart

MACD has been in the positive region for quite a period of time. However, since reaching its peak in March 2014, MACD has been falling. MACD has now moved into the negative region.
In addition, RSI and MFI are both seeing broken upward trendlines as both indicators signal the imminent downward movement in prices.

Furthermore, prices have broken the strong support that used to hold at $1.

#Bearish On Macro Outlook And The Short Run.
As a long term investor, I am rather bearish on the economic outlook for NOL despite some signs that the global economy is slowly recovering. As for the short term, the technical side of the chart are hinting to me to short NOL.

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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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