November 23, 2011
Neptune Orient Lines (NOL SP) COMPANY INSIGHTS
Transforming its business base NOL’s re-fleeting should really move the cost needle
Timothy Ross Analyst [email protected]
+852 3411 3770
Source: Company data
We initiate coverage of Neptune Orient Lines (NOL) with a BUY★★★ rating and S$1.50 target price, based on 1x P/B. We believe NOL will be one of the names most positively affected by the short-term change in sentiment towards the liner sector, which we expect to begin early next year as capacity exits the system, due to its liquidity, profile, and link to the Singaporean government.
Davin Chunpong Wu Analyst [email protected]
+852 3411 3781
At the top line, NOL has increased its exposure to the growing intra-Asian trade lanes, although it still generates more than 50% of revenue from Transpacific routes. Thus, the company should benefit from any pop in rates resulting from upcoming capacity constraints, for which we see mounting evidence.
SAMSUNG vs THE STREET
Reemerging even stronger No. of I/B/E/S estimates Target price vs I/B/E/S mean Estimates up/down (4 weeks) 1yr fwd EPS vs I/B/E/S mean Estimates up/down (4 weeks) I/B/E/S recommendation
22 +68% 0/13 -1% 1/13 Uprf (3.70)
NOL’s combination of business base, balance sheet strength, and state sponsorship should ensure its survival in the current industry downturn. We believe, however, that strategic initiatives in its business mix and fleet replacement will see it strengthen its market position as normality returns. Our earnings estimates are broadly in line with the market’s this year and next, but we expect a more robust rebound in 2013 as its transformation pays off. Shipping companies are not long-term buys and holds, but we view the current price as an opportunity to build a position at a low entry price.
Longer term, we estimate that its fleet replacement program and the capacity flexibility that it retains over the next three years (through the ability to redeliver many of its chartered-in vessels) should drive its unit cost base down by around 15%. Supplementing the anticipated return to profitability of its liner business, NOL’s logistics operations should expand the 15% share of group revenue that it currently contributes and enjoy margin expansion as 2011’s growthrelated investments in the business platform bear fruit. SUMMARY FINANCIAL DATA
Revenue (US$ m) Net profit (adj) (US$ m) EPS (adj) (US$) EPS (adj) growth (%) EBITDA margin (%) ROE (%) P/E (adj) (x) P/B (x) EV/EBITDA (x) Dividend yield (%) Net debt to equity (%)
12-09 6,516 -741 -0.36 nm -5.7 -28.2 nm 1.08 -9.6 0.00 21.36
Source: Company data, Samsung Securities estimates
This report has been prepared by Samsung Securities (Asia) Limited. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES BEGIN ON PAGE 11
12-10 9,422 447 0.17 nm 8.9 15.3 8.5 1.36 5.7 2.30 11.70
12-11E 9,380 -313 -0.12 nm 0.6 -9.9 nm 0.70 69.8 0.00 59.42
12-12E 10,054 -64 -0.02 79.6 3.3 -2.2 nm 0.72 13.6 0.00 86.66
12-13E 11,470 584 0.23 nm 9.7 18.6 3.5 0.59 3.8 4.55 65.71
Neptune Orient Lines THE PITCH RETURN FORECAST
Neptune Orient Lines (NOL) ticks all the boxes that we are looking for: an intra-Asian service skew, a conservatively managed balance sheet, sound corporate governance, and a commitment to lowering its cost base. We believe that it will emerge from the current industry downturn in better shape and could play a part in industry consolidation. We initiate coverage of NOL at BUY★★★ and S$1.50 target price.
Cost-base reduction: We see unit costs (opex/TEU) falling 15% over the
P/E (adj) (x) P/B (x) EV/EBITDA (x) Dividend yield (%) ROE (%)
12-11E nm 0.7 69.8 0.00 -9.9
12-12E nm 0.7 13.6 0.00 -2.2
12-13E 3.5 0.6 3.8 4.55 18.6
SAMSUNG vs THE STREET Samsung
EPS 12-11E EPS 12-12E
EPS 12-13E Buy/Hold/Sell
US$0.05 Uprf (3.70)
AT A GLANCE Business summary NOL is a major container shipping company, operating a fleet of about 600,000 TEUs with an order book that could see this grow by 50% to 2014. It also features a growing logistics business and nine shared and captive container terminals in the US and Asia. Sector Transportation NOL SP Bloomberg code Market cap
Shares out (float) 52-week high/low
2.58bn (32%) S$2.38/1.00
ADT (3M) Price performance
US$12.54m 6M 12M
Neptune Orient Lines Straits Times Index
1M -5% +0%
next three years as new vessels with more compelling operational economics enter the fleet. Primarily these last are driven by scale economies and more fuel-efficient engines.
Extending its competitive advantage: Access to capital at low financing costs is a crucial advantage that NOL has on account of its current scale, past performance, and prevailing GLC-sponsorship. This allows the company to reshape its fleet at much lower capital and operational costs/slot at a time when its smaller competitors are expected to be creditconstrained.
Deleveraging: Debt is expected to top out at about US$5bn in 2012, in line with the timing of peak deliveries. Net debt-to-total capital will hit about 66% in 2011, but should fall rapidly for the following two years, allowing dividend payments to resume.
Robust logistics contributions continue: Double-digit revenue growth is anticipated at the logistics division, along with margin expansion over the next 12 months. While we consider that this will be insufficient to offset the liner division’s losses, we believe the logistics business is an important creator of value for NOL stakeholders. VALUATION
Reversion to the mean expected by 2013: Our profit forecasts suggest that NOL should trade in excess of book value by 2013 and at book value over the next 12 months.
Break-up value takes this even higher: Were the business to be disaggregated and sold, we believe that its value/share would be even greater than P/B suggests. We initiate coverage on NOL with a 12-month target price of S$1.50. BEAR VIEWS & BLUE SKIES
In our bear case, the wheels fall off global trade, there is no slippage in delivery, and industry participants continue to operate all capacity at below breakeven rates. Assuming the same sets of margins and trough P/B as we saw three years ago, we could see as much as 43% downside in the stock from here, with a bearish target price of S$0.60.
A more benign outlook assumes that industry participants adopt capacity restraint voluntarily and on a more sustainable basis than the short-term trade that we are suggesting will occur. This would imply that NOL’s blended rates rise to about US$1,382/TEU, which would still remain short of 2010’s US$1,394 average and well short of historical peak levels in the mid-US$1,500s. This could see NOL’s EBIT margins recover to around 6% in 2012, and the sorts of P/B multiples emerge that NOL traded at in 20052006, or around 1.4x –equivalent to a target price of S$1.95.
THREE NUMBERS THAT MATTER
Turn in transpacific freight rates
Intra-Asian freight rates
1Q12 idle capacity
8% through to 2014.
November 23, 2011
Neptune Orient Lines (NOL SP)
Rising returns should push multiples higher With positive earnings unlikely to be reported this year and next, we are compelled to look at asset-based valuation methodologies, with price-to-book chief amongst these. At its current 0.8x, NOL is trading at almost one standard deviation below its longterm mean forward P/B of just over 1x. While above the 0.35x P/B recorded in Mar 2009, it is almost a full multiple down from its Jan 2011 highs. Figure 8: NOL’s rolling P/B trading range
Figure 9: NOL’s rolling P/B vs ROE
100% 80% 60% 40%
+ 1 SD 1.5x
-20% -1 SD
Rolling PB (Left) Source: Company data, Bloomberg, Samsung Securities estimates
Source: Company data, Bloomberg, Samsung Securities estimates
As with most highly operationally geared, capital-intensive businesses, there is a strong coincident relationship between valuations and returns, with the latter generally leading the former. We expect NOL’s ROE to rally from the current year’s -9.4% to over 20% in 2013. Looking at history, this suggests that NOL should trade at a P/B of around 1x, equivalent to a target price of S$1.40. A figure of this magnitude is corroborated by a break-up analysis valuing the company at S$1.63/share. This assumes all chartered fleet is returned, owned vessels are divested at prevailing market values, along with containers and the logistics business, and that net balance sheet debt is repaid. The terminal assets are also taken into account, although 90% of its throughput is NOL- or alliance partner-based, so their value is likely at the lower end of the comparable company spectrum. We have also adjusted the resulting valuation for a 20% haircut to represent the potential bid-offer spread required to divest such a portfolio of assets at any one time.
November 23, 2011
Neptune Orient Lines (NOL SP) Figure 10: NOL break-up valuation Asset
Terminals Logistics operations less: Net debt Equity value
US$m US$m US$m US$m
900 750 -1,759 4,169
Adjusted equity value Equity value/share
Comment Average age of 6.3 years and US$/TEU of US$8,150 670k boxes, average age of 5 years,10-year useful life, new box cost of US$2,800 2009A EBITDA adjusted for subsequent liner sales & multiple of 12x 2012E NPAT of US$75m, P/E of 10x Year-end estimate for 2011
A 20% haircut for liquidity impact 2.583bn shares outstanding; 1.26 SG$:US$
Source: Clarksons, company data, Samsung Securities estimates
We have used a simple average of the two approaches to derive our target price of S$1.50.
November 23, 2011
Neptune Orient Lines (NOL SP)
Bear Views & Blue Skies
Favourable risk-reward balance All of the companies in the sector have similar key drivers. Bear views centre on all the capacity that is ordered showing up on time, coupled with a slump in consumption and a further leg-up in the price of bunker fuel (although these last two drivers would typically move together). A bull case would emerge if even more supply than anticipated is idled, scrapped or cancelled, with rates ramping up as a consequence. Bear case—early 2009, “déjà vu all over again”—target price at S$0.60 The wheels fall off global trade, there is no slippage in delivery, and industry participants continue to operate all capacity at below breakeven rates. We saw this three years ago and there is no reason to suggest that pessimistic scenarios would not be repriced into the stock if these factors were to play out against a backdrop of global economic downturn. Assuming the same sets of margins and trough P/Bs, we could see as much as 43% downside in the stock from here, with a bearish target price of S$0.60. Blue skies case—reality bites—target price at S$1.95 While our central view is based on some form of industry discipline being forced upon the liner segment’s participants, a more benign outlook assumes that they adopt these measures voluntarily and on a more sustainable basis than the short-term trade that we are suggesting will occur. This would imply that NOL’s blended rates rise to about US$1,382/TEU, which would still remain short of 2010’s US$1,394 average and well short of historical peak levels in the mid-US$1,500s. This could see industry EBIT margins recover to around 8% in 2012, NOL’s to be a couple of percentage points lower, and the sorts of P/B multiples would emerge at which NOL traded in 2005-2006, or around 1.4x, equivalent to a bullish target price of S$1.95.
November 23, 2011
Neptune Orient Lines (NOL SP) Appendix—Company background Leading player in transpacific and ASEAN markets Neptune Orient Lines (NOL) is the world’s seventh-largest liner company and is the largest in its Singapore home market. NOL operates a container shipping and logistics business through its key brands—APL and APL Logistics. APL operates a fleet of 145 vessels (598,577 TEU), of which, 98 vessels (or ~70% of TEU total capacity) are chartered-in. It is a leading player in the transpacific market, with a 9% market share in 2010 and which accounts for more than half of its revenue. In recent years, APL has been expanding its presence in the intra-Asian markets, which now account for 40% of its container volumes. Figure 11: Revenue breakdown by trade routes (2011E)
Figure 12: Volume breakdown by trade lane (2011E)
Intra-Asia 40% Transpacific 53% Asia-Europe 24%
Source: Company data, Samsung Securities estimates
Source: Company data, Samsung Securities estimates
Listed on the Singapore Stock Exchange in 1981, NOL is controlled by Temasek Holdings—the investment arm of the Singapore government, which owns a 67% stake in the company. Ng Yat Chung has taken over the role of Group President and CEO; before joining NOL, Mr Ng served as a senior executive in Temasek and has been the Chief of the Defense Force for Singapore. Figure 13: Global top-ten container shipping lines Rank 1 2 3 4 5 6 7 8 9 10
Operator APM-Maersk Mediterranean Shg Co CMA CGM Group COSCO Container L. Hapag-Lloyd Evergreen Line APL CSCL Hanjin Shipping MOL
TEU 2,472,899 2,029,758 1,350,232 650,867 622,490 608,056 582,560 509,798 489,381 435,565
Ships 647 472 403 147 143 166 143 146 103 103
November 23, 2011
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