We have raised loss estimates for NOL in 2013 as we believe the very weak spot rates in 2Q13, which are below 2Q12 levels for the Asia-Europe and transpacific trades, will hurt performance. Also, the transpacific annual contracts were likely renewed at flat levels.
Although NOL indicated during our conference that it is likely to perform better in 2013 than in 2012, we think that the improvement could be marginal as cost reduction efforts are offset by the weaker market. We also reduce profit forecasts in 2014-15. We stay Underperform and our target price remains based on an FY13 P/BV of 1.1x (2011 historical average). De-rating catalysts include spot rate erosion after the 1 July rate hikes.
NOL’s Investor Relations, Au Kah Soon, attended the CIMB Annual Asia Pacific Conference on 19-20 June. The key takeaway was that NOL would continue its cost reduction efforts in 2013 that would hopefully deliver operating cost savings almost matching the US$500m saved in 2012.
NOL will take delivery of 14 new vessels this year and 10 next year, while at the same time return 31 high-cost charters over 2013-14. This will lower its structural costs.
Separately, with a large number of carriers announcing general rate increases (GRI) from 1 July, and with rates reaching desperate levels, there is a high chance of spot rates rising, but sustainability is still a question mark.
In our most recent container shipping sector piece (Click here to read), we noted that carriers have barely reduced their capacity deployment in any material sense, in contrast to late-2011 when carriers made massive capacity adjustments that set the stage for a powerful five-month rate rally.
As a result, we believe that the 1 July GRI could erode fairly quickly unless peak season demand was stronger than expected. Furthermore, the recent announcement of a planned mega-alliance between Maersk, MSC and CMA CGM, while beneficial for the sanity of the industry, will not take effect until 2Q14.
What You Should Do
While we like NOL’s cost reduction efforts, we recommend avoiding the stock until we see more evidence of a sustainable industry spot rate recovery. We have applied a P/BV of 1.1x to determine the target price, which is based on the 2011 historical average, as we believe that 2013 most closely resembles that tough year. (Read Report)
Source : CIMB Research