NOL

Kim Eng on 7 Feb 2012

Robust volume offset by weaker rates. Neptune Orient Lines (NOL) reported a 6% YoY increase in container shipping volumes for the six weeks from 19 November 2011 to 30 December 2011 (Period 12). This was helped by the burgeoning intra-Asia traffic growth. However, the average revenue per forty-foot equivalent unit (FEU) fell by 14% YoY to about US$2,265/FEU, reflecting persistent industry challenges, in particular on the long-haul routes. We maintain our Hold rating on NOL.

4Q11 results may fall short of consensus. On a full-year basis, NOL’s container shipping volumes rose by 7% while average revenue per FEU was down by 10%, largely in line with our assumption. In view of the stubbornly high bunker prices, we trim our FY11 net loss forecast by a slight 2% to US$291.5m (which implies a widening in 4Q net loss to US$133.7m). In any case, we think the weak results should not come as a major negative surprise to the market.

A good CNY rally. By and large, shipping stocks have outperformed the general markets since the beginning of the year. Buoyant shipping volumes ahead of the Chinese New Year (CNY) factory closures in Asia have filled ships to bursting. Some container lines have even reported load factors in excess of 100%, thus allowing carriers to push ahead with a coordinated rate increase.

Maersk rate hike overly aggressive. Adding to the optimism, Maersk has proposed to more than double the current spot rates on the Asia-Europe route by US$775/TEU to US$1,512/TEU from 1 March 2012. We do not think this aggressive rate hike can fully materialise in the face of global overcapacity and ailing Eurozone economy.

Wait for better entry level. The recent positive macroeconomic data from the US and China could support a more sustainable rate recovery in 2H12 coupled with further capacity rationalisation. We raise our target price to $1.35, based on mid-cycle valuation of 1.0x FY12F P/BV. We believe a better buying opportunity should arise later when rates are widely expected to decline post the seasonally slow CNY period.