SINGAPORE SINGAPORE Company CompanyUpdate Update Results
MITA No. 010/06/2009 MITA No. 010/06/2010
1 October 2010
Neptune Orient Lines Ltd
Maintain
BUY
Poised to leverage on a rising tide
Previous Rating: BUY
Current Price: Fair Value:
S$1.98 S$2.41
4000
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5
3500 3000
STI
2500
NOL
2000 1500
Reuters Code
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
1000
NEPS.SI
ISIN Code
N03
Bloomberg Code
NOL SP
Issued Capital (m)
2,583
Mkt Cap (S$m / US$m)
5,114 / 3,687
Major Shareholders Temasek Holdings
67%
Free Float (%)
33%
Daily Vol 3-mth (‘000)
16,315
52 Wk Range
1.510 - 2.350
(US$ m)
FY 08
FY 09
FY 10F
FY 11F
Revenue
9,285.1
6,515.6
8,667.2
9,939.6
956.1
-20.4
866.7
1192.7
5.6
-28.7
7.5
13.1
25.5
N.A.
19.2
10.9
0.9
1.3
1.3
1.1
Gross Profit EPS (US Cts) PER (x) P/NAV (x)
Lee Wen Ching (65) 6531 9806 e-mail:
[email protected]
The tides are turning. We attended the annual Marine Money conference over the past week, where participants were generally cautiously optimistic over the container shipping industry's outlook. Liners are widely expected to post a recovery in 2010 following huge industry-wide losses in 2009; and while freight rates are expected to soften in 2011, the pullback is expected to be contained and rates should not plunge to the unprofitable levels seen during the crisis last year. Global GDP, a key leading demand indicator, is expected to grow by 4.6% in 2010 and 4.3% in 2011 following a 0.6% contraction in 20091. Coupled with positive economic data such as higher-than-expected US retail sales and a pick up in manufacturing activity, demand for container trade is poised for a rebound. Neptune Orient Lines (NOL), which counts itself among the top five global liners by fleet size2, is well positioned to leverage on this recovery. A delicate balance of demand and supply. Freight rates have rebounded strongly in 2010 thanks to inventory restocking, slippage and a shortage of container boxes. Moving forward, maintaining the delicate balance of vessel demand and supply will be key to how freight rates pan out. On the supply side, the order book for containerships has been estimated to have contracted to 28% of total fleet, a significant improvement from the 40% seen pre-crisis. The bulk of deliveries have been scheduled for 2011 and 2012. The order book shrinkage bodes well for liners as it eases capacity overhang worries. On the demand side, most market watchers anticipate positive, albeit moderating growth in 2011, and this should continue to support trade flows. Liners have so far proven able to act swiftly to restore the demand and supply equilibrium, and industry discipline remains crucial in ensuring freight rate stability in 2011. Leveraging on exposure to high growth markets. Our confidence in NOL is further buoyed by its exposure to high growth markets. This appears to have been overlooked by the market. Asia and US each account for 40% of the group's volume, while Europe forms the remaining 20%. Robust Asian trade flows and brightening US economic prospects could propel NOL's recovery ahead of its peers. Our projections and S$2.41 fair value estimate (based on 1.46x blended FY10/ 11F NTA, in line with its previous recovery phase) remain intact. We maintain our BUY rating on NOL. 1
IMF, OECD, The Economist via Clarkson Research
2
http://www.alphaliner.com/top100
Please refer to the important disclosures at the back of this document.
Neptune Orient Lines Ltd
Leading economic indicators paint a rosy picture. US retail sales have outperformed expectations, increasing 0.4% in August after rising 0.3% in July (exhibit 1). Excluding autos, core retail sales grew by an even more impressive 0.6%. Meantime, the ISM (Institute for Supply Management) Manufacturing Index rose from 55.5 in July to 56.3 in August (exhibit 2). A reading of over 50% indicates expansion relative to the prior month, whereas a sub-50% reading indicates contraction. These leading economic indicators, coupled with the projected growth of global GDP, suggest that the risk of a double-dip recession is low. Given that container trade demand is closely correlated to GDP growth, we anticipate rosier prospects for the liner industry.
Exhibit 1: US Retail Sales
Source: Briefing.com
Exhibit 2: ISM Index
Source: Briefing.com
Page 2
1 October 2010
Neptune Orient Lines Ltd
Poised to leverage on the rising tide. NOL ranks fifth among the global containership industry in terms of fleet size and accounts for approximately 4.1% of total market share (exhibit 3). The group is poised to leverage on global trade rebound, backed by its exposure to Asia (40% of total volume) where growth remains robust, and US (40% of volume) where economic prospects appear to be brightening.
Exhibit 3: Ranking and market share of top 30 liners
Source: Alphaliner
Risks. Risks facing the container shipping industry include slower than expected economic growth and accelerated vessel delivery, which could threaten to derail the delicate vessel demand and supply equilibrium. On a company-specific level, NOL's fleet profile may potentially expose the group to vulnerability in terms of deployment inflexibility. We note that the group has two 10,700-TEU (twenty-foot-equivalent unit) container ships due for delivery in 2012. Such large vessels provide benefits such as lower unit costs thanks to economies of scale, but their deployment tends to be less flexible due to the large size, therefore exposing operators to potential demand shocks.
Page 3
1 October2010
Neptune Orient Lines Ltd
Exhibit 4: NOL's vessel commitments
Source: Company
Page 4
1 October 2010
Neptune Orient Lines Ltd
NOL's Key Financial Data EARNINGS FORECAST Year Ended 31 Dec (US$m) Revenue
BALANCE SHEET FY08
FY09
FY10F
FY11F
As at 31 Dec (US$m)
9,285.1
6,515.6
8,667.2
9,939.6
Cash and cash equivalents
Gross profit
956.1
-20.4
866.7
1,192.7
Other current assets
Net op expenses
-792.0
-623.9
-564.3
-735.1
Property, plant, equipment
EBIT
164.1
-644.3
302.5
457.6
Total assets
Finance cost
-34.9
-59.3
-56.4
-56.4
Debt
8.0
3.4
5.1
5.1
PBT
137.2
-700.1
251.1
406.3
PAT
88.3
-739.1
201.4
349.4
Shareholders equity
Minority interests Net profit
5.1 83.1
1.7 -740.8
8.7 192.8
9.9 339.5
Total equity Total equity and liabilities
Year Ended 31 Dec (US$m)
FY08
FY09
FY10F
FY11F
Op profit before working cap.
498.9
-269.3
545.1
704.6
EPS (US cents)
0.9
-281.2
-141.4
-134.7
NAV per share (US cents)
Net cash from operations
499.8
-550.6
403.7
569.9
EBIT margin (%)
Purchase of PP&E
-879.0
-89.1
-140.0
-140.0
PBT margin (%)
36.0
16.1
0.0
0.0
Investing cash flow
-843.1
-73.0
-140.0
-140.0
Associates / JVs
FY08
FY09
FY10F
FY11F
429.2
333.0
558.2
920.2
1,061.3
1,171.1
1,199.2
1,351.9
3,642.6
3,509.3
3,411.7
3,309.8
5,444.6
5,340.6
5,496.3
5,909.1
1,244.6
939.8
939.8
939.8
Current liabilities excluding debt
1,468.2
1,337.2
1,333.5
1,461.6
Total liabilities
2,940.0
2,500.4
2,493.2
2,624.5
2,460.5
2,796.6
2,950.8
3,222.4
2,504.6 5,444.6
2,840.2 5,340.6
3,003.1 5,496.3
3,284.6 5,909.1
FY08
FY09
FY10F
FY11F
5.6
(28.7)
7.5
13.1
167.3
108.3
114.3
124.8
1.8%
-9.9%
3.5%
4.6%
1.5%
-10.7%
2.9%
4.1%
Net profit margin (%)
0.9%
-11.4%
2.2%
3.4%
PER (x)
25.5
N.A.
19.2
10.9
CASH FLOW
Working cap, taxes and interest
Other investing flows
KEY RATES & RATIOS
Financing cash flow
268.1
527.4
-38.6
-67.9
Price/NAV (x)
Net cash flow
-75.1
-96.2
225.1
362.0
Dividend yield (%)
Cash at beginning of year
504.4
429.2
333.0
558.2
ROE (%)
Cash at end of year
429.2
333.0
558.2
920.2
Net gearing (%)
0.9
1.3
1.3
1.1
4.0%
0.0%
1.0%
1.8%
3.4%
-26.5%
6.5%
10.5%
33.1%
21.7%
12.9%
0.6%
Source: Company data, OIR estimates
Page 5
1 October2010
Neptune Orient Lines Ltd
SHAREHOLDING DECLARATION: The analyst/analysts who wrote this report holds NIL shares in the above security. RATINGS AND RECOMMENDATIONS: OCBC Investment Research’s (OIR) technical comments and recommendations are short-term and trading oriented. - However, OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month investment horizon. OIR’s Buy = More than 10% upside from the current price; Hold = Trade within +/-10% from the current price; Sell = More than 10% downside from the current price. - For companies with less than S$150m market capitalization, OIR’s Buy = More than 30% upside from the current price; Hold = Trade within +/- 30% from the current price; Sell = More than 30% downside from the current price. DISCLAIMER FOR RESEARCH REPORT This report is solely for information and general circulation only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without our written consent. This report should not be construed as an offer or solicitation for the subscription, purchase or sale of the securities mentioned herein. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities. OCBC Investment Research Pte Ltd, OCBC Securities Pte Ltd and their respective connected and associated corporations together with their respective directors and officers may have or take positions in the securities mentioned in this report and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally. Privileged/Confidential information may be contained in this message. If you are not the addressee indicated in this message (or responsible for delivery of this message to such person), you may not copy or deliver this message to anyone. Opinions, conclusions and other information in this message that do not relate to the official business of my company shall not be understood as neither given nor endorsed by it.
Co.Reg.no.: 198301152E
Published by OCBC Investment Research Pte Ltd Page 6
For OCBC Investment Research Pte Ltd
Carmen Lee Head of Research 1 October 2010
