NOL in for a "slightly disappointing" peak season

Weaker freight rates also incoming.

OCBC Investment Research predicts that despite benefiting from lower fuel costs and the roll out of cost-saving initiatives, Neptune Orient Lines will face a more tepid peak season as well as lower freight rates mainly as a result of over-capacity issues in the industry.

Here's more from OCBC:

Freight rates take a tumble. According to the Shanghai Containerised Freight Index (SCFI), average freight rates for 2Q13 have fallen by more than 13% QoQ with the decline more pronounced in certain sectors (mainly Europe and South America: -35.4% QoQ % -34.5% QoQ each). The sole sector that registered marginal improvements was Intra-Asia (+4.1% QoQ). This was in stark contrast to the figures over the same period last year where overall average freight rates improved by 31.2% QoQ as carriers collectively enforced capacity cuts and rate hikes.

Jul 1 boost may be temporary. Members of the Transpacific Stabilisation Agreement (TSA) – of which Neptune Orient Lines (NOL) belongs to – have agreed to hike rates by US$400/FEU for the transpacific route and by US$600/FEU for all other destinations, effective 1 Jul. This increase will hopefully help to boost rates ahead of the peak-shipping season. However, carriers continue to be plagued by over-capacity issues and the impact from this increase could only be temporary in nature.

Efforts to control capacity wavering? Aside from the substantial capacity adjustments back in late 2011, efforts to control capacity since then have waned despite initiatives by alliances to reduce routes, and this has led to a negation of general rate hikes implemented in Jan and Apr this year. Although there has been the recent formulation of a P3 alliance between the world’s three largest container liners (Maersk, CMA CGM and Mediterranean Shipping Company), it will only commence from 2Q14 and impact mainly the AsiaEurope trade route (of which NOL has ~15% top-line exposure).

Reduce forecasts and valuation. While the low-fuel cost environment and ongoing cost-saving initiatives will benefit NOL, we opt to lower our forecasts in light of weaker freight rates and anticipation of a slightly disappointing peak season. Lowering our P/B peg to 1.1x (1.3x previously), our fair value estimate falls to S$1.17 (S$1.38 previously). Downgrade to HOLD.