On the right track
- Headline numbers boosted by APL Logistics divestment gains, but even core numbers outperform expectations.
- Liner losses reduced on better cost management in 2Q15.
- We now forecast minor profits for NOL in FY15/16 amidst better cost efficiencies and benign oil price environment.
- Upgrade to BUY with TP of S$1.08.
Better-than-expected results.
- NOL reported net profit of US$890m in 2Q15, which includes US$887m of disposal gains from the divestment of APL Logistics, which was concluded on 29th May 2015.
- Stripping out the contribution from discontinued logistics operations, the liner division would have posted a net loss of about US$11m in 2Q15, still better than our expectations and also an improvement over the US$36m net loss recorded in 1Q15.
- Liner core EBITDA margin of 8.3% in 2Q15 is the best in several quarters. This was despite a further 6% q-o-q drop in average freight rates, led by a steep fall on the Asia-Europe lane.
Cost control is the key.
- Liner opex fell to US$2,242 per FEU, down 6% q-o-q and 14% y-o-y.
- While the c.40% y-o-y drop in average bunker fuel prices was a factor, NOL was also able to record significant cost savings (around US$223m) in 2Q15 from better network planning, return of expensive charters and more targeted cargo selection strategy.
- In fact, the drop in bunker fuel prices was more than neutralised by removal of bunker surcharges and freight rate declines, and the actual improvement in profitability was driven by other cost efficiencies.
- With the expected return of nine more chartered-in vessels in 2H15, we can expect further cost reductions to materialise.
Minor profitability achievable, upgrade to BUY.
- Though freight rates, especially on the Asia-Europe lane, are still bouncing near multi-year lows, NOL’s strategy to sacrifice market share and focus on restoring profitability seems to be slowly yielding fruit.
- With the peak season coming up in 3Q, we see hopes of the liner returning to the black.
- Though core ROE will still be nowhere near desired levels in the near term, NOL’s competitiveness is on the rise and a healthier balance sheet can help NOL plan for the big league again.
- Stock price has retreated 17% since our downgrade in May; we believe there is sufficient upside at current valuations.
- Upgrade to BUY with a TP of S$1.08 (0.8x P/BV in line with peer valuations).
(Suvro SARKAR)
Source: http://www.dbsvickers.com/
