Time to hold Neptune Orient Lines

Neptune Orient Lines (NOL) belongs to the G6 Group. It recently pulled the LOOP 3 service on the Asia-Europe route after carriers cited the forecast lack of improvements in the trade lane. In May, Neptune Orient Lines decided to drop plans for a seventh loop service, which it attributed to weak market conditions. Even in the peak season, cargo volumes on the AE route are not expected to experience the traditional bump. Evergreen is expected to start loop service on the AE route; demand could be further weakened due to potential rate cuts.

BUSINESS ANALYSIS

Although the AE route is weak, the transatlantic route remains strong. In August, the incremental rate changes occurred, which have held well, defying market expectations. This route contributes about 40% of the trade revenue and with good business here, the fallout from AE in 3Q could be cushioned. Since it is unclear whether the in season demand would pick up, the QOQ earnings increase of 6% is unchanged.

KEY RISKS

Key risks are the rise in furl rates as well as diminished returns from diminished freight rates. Although a decline in air freights is not expected in 4Q, larger declines in AE and Intra-Asia, would raise concerns over earnings. Potentially, increases in August prices would be given back. Bunker fuel prices have also been rising, leading to further dampening of an already weak environment. 

BETTER PROSPECTS

Despite the weak environment, the industry is expected to withdraw service/capacity as it is aware that the management of shipping capacity is essential. There could also be cost savings based on Neptune Orient Lines’s Efficiency Leadership Programme (ELP).  NOL maintains a P/B based Fair Value estimate that is unchanged at S$1.38.

FINANCIAL ANALYSIS

The revenue of Neptune Orient Lines has increased, however, the Net Profit after tax has just turned positive after being negative for the last two years. The Return on Investment is also just 2.2% in FY13F after being negative in FY12F. Debt of the company has increased considerably in FY13F as compared to the previous years. Total assets have increased but not at the rate of debt and liabilities. However, with the expected increase in business, it is possible that the company could perform well in the future.          NOL has not declared dividends and is not expected to do so in the future. Bank and Cash Balances have decreased in FY13F but debt has increased in the same period. This is something that needs a closer look.   

Cash flow from investing activities has become negative, indicating a loss. This has also had an effect on the net cash flow, which has also turned negative. But cash has been raised through financing activities. Operating cash flow has also increased, signalling a positive trend.EPS has also increased as compared to the previous two years, signalling a positive trend. Return on Equity (ROE) has also increased as compared to the two previous years.

RECOMMENDATION

It is recommended to hold the share of Neptune Orient Lines based on better forecast ed earnings in the future.