NOL stands to lose a whopping US$286m in FY11

Volume growth decelerates... Neptune Orient Lines released its Period 11 operating data for the four weeks from 22 October 2011 to 18 November 2011. Container shipping volumes rose by a slower-than-expected 2% YoY, aided by higher volumes carried on the Intra-Asia trade lane. Weekly volumes marked a 7% MoM contraction, a further sign of slowing demand.

…but rates appear to be stabilising. On the flip side, the average revenue per FEU (forty-foot equivalent unit) fell by 14% YoY but remains flat MoM to about US$2,400/FEU. Management attributed the drop to lower freight rates in the major trade lanes, particularly the long haul routes. On a YTD basis, container shipping volumes increased by 8% while average revenue per FEU fell by 10% YoY.

Expect weak 4Q11 results. We maintain our full-year net loss forecast of US$286m in FY11F (9M11 net loss was US$158m), which would imply a widening of 4Q net loss to US$128m. We do not think this should come as a major surprise to the market. According to some liners, the current depressed rates fail to even cover basic operating costs, let alone the stubbornly high bunker prices.

Seeking interim rate relief. The Transpacific Stabilization Agreement is proposing to raise Asia-US rates by a minimum of US$400/FEU from 1 January next year. Certain carriers such as Maersk Line and Hanjin Shipping also have plans to increase rates on the Asia-Europe route by US$200/TEU. In our view, the success of the intended rate restoration remains to be seen given the huge overcapacity in the industry.

Too early to pull the trigger. NOL’s share price has been relatively firm in recent times on positive newsflow of capacity rationalisation by leading carriers, but we think it is still too early to buy into the stock as the total number of idled ships currently (about 3% of global fleet) is hardly enough to offset the supply glut. Maintain Hold and target price of $1.10, based on 0.8x FY12F P/BV.