Thursday, May 14, 2009

NOL - Sell by OCBC (13 May 09)

Deeper in the red. Neptune Orient Lines Ltd (NOL) turned in a poor set of 1Q09 results. The group reported a net loss of US$244.6m vs. a US$120.7m profit a year ago. 1Q09 losses were wider than the US$148.5m loss incurred in 4Q08. Revenue slumped 35.9% YoY and 32.6% QoQ to US$1.5b. Key culprits for NOL's weak performance were the slump in global trade flows coupled with deteriorating freight rates across all trade lanes. A reduction in non-recurring gains from asset disposals (US$3m in 1Q09 vs. US$18m in 1Q08) magnified the slump in earnings. The group's poor performance led to a net operating cash outflow of US$139.4m in 1Q09 as compared to an inflow of US$212.9m a year ago.

Revenue declined across all segments. Container Shipping, the group's key revenue contributor, saw revenue slide 35.9% YoY to US$1.3b on the back of depressed freight rates and lower demand for container freight. Average revenue per FEU (Forty-foot Equivalent Unit) has fallen 16% YTD owing to lower bunker recovery and core freight rates, while volume handled has slumped 27% as a result of the global economic downturn. Utilisation of its container shipping network continued heading south despite the group's capacity reduction efforts, coming in at just 80% in 1Q09 as compared to 95% in 1Q08 and 83% in 4Q08 (exhibit 1). This brings the group's utilisation rate down to levels seen during the previous crisis in 2002. The Logistics and Terminals segments similarly suffered revenue contraction as a result of lower throughput volumes. Revenue from Logistics declined 33.6% YoY to US$241m while that from Terminals fell 22.8% to US$112m.

Not out of the woods yet. While NOL has been taking proactive measures to contain costs and improve asset utilisation, these have not been sufficient to mitigate the group's rapid revenue decline. Management has put in place cost-reduction initiatives that could result in US$550m of cost savings for the year, and we expect these to take some pressure off the group's earnings in subsequent quarters. Notwithstanding this, NOL expects operating conditions to remain challenging for the year ahead, and has reiterated its projection of full year losses for FY09, which we had already taken account into our estimates. NOL's revival hinges on the recovery of global trade flows, which remains uncertain at this juncture. We are keeping our estimates and SELL rating unchanged. Our fair value estimate remains at S$0.815.

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