Neptune Orient Lines Limited: Period 3 sees highest volumes YTD

Period 3, 2011 operating statistics
Maintain OUTPERFORM and target price of S$2.45; no change to earnings. NOL released their period 3 statistics yesterday for the four-week period from 12 March to 8 April 2011. Average rates dropped a small 0.1% sequentially from period 2, due to the continued decline in spot Asia-Europe (AE) rates and higher mix of intra-Asia (IA) volumes. However, daily volume rose 8% from period 2 as Chinese factories returned to work after the Lunar New Year holidays. Spot CCFI/SCFI rates show a slightly mixed picture, with increases for transpacific but continued declines in AE. We maintain our OUTPERFORM call with potential rerating catalysts from strong US economic growth, and container shipping rates resuming their uptrend in 2H11 and continuing into 2012. Our target price remains pegged to a P/BV multiple of 1.4x.

The details
Volumes lifted in period 3 were 12.4% higher yoy, due to higher volumes carried on the AE and IA trade lanes. NOL hit a new high in terms of daily volumes. Against period 2, daily volumes rose 8% as Chinese factories returned to production. For the 1Q, daily volumes were only 1.3% lower than the 4Q, and was 9% higher yoy.

The average rate for period 3 was 2.5% lower yoy due to lower AE rates and a higher mix of lower-rate short-sea IA volumes, but appears to have stabilised against period 2 by declining only 0.1%. Average rates for the 1Q were 5.7% lower qoq, but still 3.1% higher yoy.

Average revenue for period 3 was up 9.6% yoy, with higher volumes partially offset by lower rates. For the 1Q, average revenue was up 12.4% yoy, but dropped 6.9% qoq on lower rates.

Spot rate developments
Spot rates continued to decline in AE trades over the past month, but rose to the west and east coasts of the US, probably due to bunker cost passthroughs. The strong US retail trade and modest inventories suggest that US volumes should recover in the coming months. However, the manufacturing shutdowns in Japan and their cascading effect on global trade volumes could see trade slightly weaker than expected in 2Q before rebounding in 2H11. The AE trades continue to be weak, due to the continuing influx of post-panamax ships.

Valuation and recommendation
Maintain OUTPERFORM and target price of S$2.45. So far, 2011 is looking like a tough year, with AE spot rates still showing no signs of recovering and TP rates unlikely to be rising fast enough to offset the higher bunker costs. We have reflected expected weakness in average rates by forecasting a 33% decline in core EPS this year, while unexpected strength in bunker prices could be another source of earnings risk. However, we believe that spot rate declines should reverse in 2H11, given the strength in US consumer spending and a rapidly improving employment situation.

We maintain our OUTPERFORM call on the stock as we believe container shipping rates are in a multi-year uptrend, with 2011 as a mid-cycle correction. Our target price remains pegged to a P/BV multiple of 1.4x, which is at the higher end of its 0.5-1.5x historical range. We have not changed our earnings forecasts in this report. Potential share price catalysts include accelerating US GDP growth and freight rate recovery from 2H11. With the transpacific accounting for some 50% of NOL’s revenue, NOL is well placed to benefit from a stronger US. NOL will also benefit from structural cost reduction, via the gradual replacement of its expensive charter-ins with cheaper newbuildings from 2012 onwards.

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