No sharp improvement in industry outlook
Supply continues to be an issue with container fleet expected to expand by almost 7% in FY15, while demand growth is expected to be more sedate at 3-4%. Though bunker fuel prices have declined from US$600/MT in 2014 to about US$350/MT now, liners are increasingly passing on the savings to customers in a bid to win market share.
But delivering on cost control
Liner opex fell to US$2,242 per FEU in 2Q15, down 6% q-o-q and 14% y-o-y. NOL was able to record significant cost savings (around US$223m) in 2Q15 from better network planning, return of expensive charters and more targeted cargo selection strategy. Liner core EBITDA margin of 8.3% in 2Q15 is the best in several quarters. With the expected return of nine more chartered-in vessels in 2H15, we can expect further cost reductions to materialise.
Minor profitability looks achievable
Though freight rates, especially on the Asia-Europe lane, are still bouncing near multi-year lows, NOL’s strategy to sacrifice market share and focus on restoring profitability seems to be slowly yielding fruit. With the peak season coming up in 3Q, we see hopes of the liner returning to the black.
Though core ROE will still be nowhere near desired levels in the near term, NOL’s competiveness is on the rise and a healthier balance sheet puts NOL on a better footing. With valuation at an attractive level of 0.6x P/BV, we believe NOL looks ripe for M&A activities as consolidation is surely the way forward for the container shipping industry. Maintain BUY with a TP of S$1.08 (0.8x P/BV).
Key Risks to Our View:
Big mergers are rare in the container-shipping industry. The industry is dominated by family-owned businesses and sovereignwealth funds, who do not want to give up control and are typically better equipped to endure years of losses during long downcycles without going bankrupt. (Read Report)
Source : DBS Group Research