Neptune Orient Lines - Reduce: Better than expected 2Q15 results on cost control


 2Q15 recurring loss of USD27m was lower than our and consensus forecasts due to better cost control

 Lack of scale may hurt competitiveness; we lower our 2015 recurring loss forecast by 30% to reflect lower costs

 Reiterate Reduce rating with higher TP of SGD0.80 (from SGD0.70) on lower 2015 loss forecast

Strong cost control helped offset weak revenues in 2Q15:
NOL’s reported profit of USD890m included one-off gains of USD887m from the disposal of its logistics business. Stripping out these gains, we estimate NOL incurred a recurring loss of USD27m, lower than our and company sourced consensus loss forecasts of USD111m and USD36m, respectively, despite a sharp decline in volumes and freight rates. We attribute the lower losses to the company’s efforts to rein in costs through network optimisation, returning expensive charters and targeted cargo selection, and lower depreciation and finance costs. NOL used the USD1.2bn proceeds from the sale of the logistics business to improve its net debt to equity ratio from 2.3x at 1Q15 end to 1.0x in 2Q15.

Scaling back capacity and lack of new vessel orders could hurt competitiveness:
During the analyst briefing, management guided that there was further scope to control costs by returning chartered vessels and improving yields by exiting unprofitable trades. This was also one of the reasons for a sharp 14% y-o-y decline in volumes in 1H15. By the end of 2015, NOL expects its fleet to shrink by 15% (9 charter vessel expiries in 2H15) compared to the end of 2013 and we estimate its market share will shrink by 1ppt to 2.7% in terms of global capacity during this period. We argue that while this may help NOL in the short term to control costs and improve profits, it will be challenging to gain back lost market share. Further NOL has no mega vessels (18,000+ TEU) in its fleet or on order and hence we believe it remains uncompetitive vs. its peers at least in 2015-17e.

We lower our 2015 loss forecast to USD240m (from USD342m) to reflect lower operating costs, depreciation and interest expenses. Our operating loss (EBIT) forecast of USD108m in 2015e compares with Bloomberg consensus forecast for a profit of USD36m.


Technical Analysis
Daily Chart
Reiterate our Reduce rating with a higher TP of SGD0.80 (was SGD0.70) on higher earnings forecasts
We value NOL based on an unchanged 0.6x 2016e PB for an average 2015-16e ROE of -7%. Despite losses in 1H15 and weak outlook for the rest of the year, NOL’s share price has increased by 10% in the YTD outperforming the local index by 13%. We attribute this to the speculation of a potential sale of NOL (source: The Wall Street Journal, 16 July 2015) and this remains an upside risk to our view. (Read Report)

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Source : HSBC Global Research

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