|Picture Credits : worldmaritimenews.com|
■ NOL disclosed to the SGX late Saturday evening that it is in preliminary talks with CMA CGM and AP Moller Maersk “with respect to a potential acquisition of NOL”.
■ This is the strongest signal yet that there are interested parties, and the price is unlikely to be lower than S$1.50, an 11% premium over BV of S$1.35 at end-3Q15.
■ We maintain Hold, and our target price based on P/BV valuation of 0.76x (1 s.d. below average since 2001), but note that risks are skewed to the upside.
Potential interest from CMA CGM and Maersk
● It is not a surprise that CMA CGM and Maersk are exploring the possibility of acquiring NOL, since these two are among the best performing carriers in an otherwise-troubled industry. Also, these two Europe-based carriers have large exposures to the Asia-Europe (AE) trade, but a much lower presence on the transpacific (TP) trade, which would be boosted by an NOL acquisition.
Trade exposures need to be balanced out
● The Ocean 3 alliance (CMA CGM, CSCL and UASC) and the 2M alliance (Maersk and MSC) generally have capacity market shares on the TP trade that are only half of their capacity market shares on the AE trade. In contrast, the G6 alliance (of which APL is a part) and the CKYHE alliance have exposures on the TP that are significantly more than their exposures on the AE trade.
Transpacific trade is becoming more important
● Industry-wide TP trade volumes rose a very healthy 5.7% yoy for 9M15, but AE trade volumes declined 4.7% yoy. The AE trade decline has progressively gotten worse; in 1Q15 it dropped 1% yoy, 2Q volume was down 6.3% yoy, and 3Q volume fell 7% yoy. In contrast, TP trade volumes have been rising at a faster rate over the same period: up 4.3% yoy in 1Q15, 6.2% in 2Q, and 6.3% in 3Q.
APL has 5.5% market share of the TP trade
● An acquisition of APL would give the buyer an additional 5.5% market share of the TP trade, which is strategically important for major carriers like CMA CGM and Maersk. Opportunities to buy other major container shipping lines are extremely rare, and especially not one that has valuable exposure to the TP trade.
Will there be a deal?
● Nobody knows if Temasek and CMA CGM or Maersk can come to a deal. While Temasek is under no pressure to sell cheap, neither will there be too much resistance to sell an underperforming asset which is a recurring blemish on its report card. Any deal could not possibly be below NOL’s book value of S$1.35/share, but we think anything less than S$1.50 would be rejected, based on our sources.
NOL’s share price is not too much higher than our trough valuation
● Our target price of S$0.95 is based on a trough P/BV multiple of 0.76x, where we think the share price should hover in the absence of M&A negotiations, due to extremely low spot freight rates and poor outlook for profitability in the immediate future. We note that NOL’s current share price is just 10.5% higher that the trough valuation.
NOL stock could see more upside
● A deal to acquire Temasek’s 67% stake in NOL would result in a mandatory general offer for the remaining NOL shares, while a deal to acquire NOL’s wholly-owned subsidiary, APL, would result in a special dividend payout. In our view, the risk-reward ratio is skewed to the upside, and investors who have the appetite to trade can accumulate the stock on the M&A potential. Our call on the operating fundamentals of NOL, without taking a potential M&A into account, remains a Hold. (Read Report)
Read Related Report
1) Neptune Orient Lines (NOL) - Confirms preliminary talks with CMA and Maersk on potential sale; we assess the pros, cons & valuations by JP Morgan Asia Pacific Equity Research, published on 10 November 2015
Source : CIMB Research