NOL must be deeply worried over debt increasing to $3.1b

It's swinging into the red.

Here's an article TradeWinds wrote:

Growing debt and a lengthening path back to profitability caught the eyes of analysts tracking Neptune Orient Lines after the Singaporean container line put in a disappointing fourth quarter showing.

SGX-quoted NOL booked a loss of $98.1m in the last three months of 2012 taking its deficit for the full-year to $419.4m

Jon Windham an analyst at Barclays Capital said: “For the four years ending December 2012 NOL has produced a cumulative net loss of $1.2bn.”

NOL’s fourth quarter red ink means it has recorded only one profitable quarter during the past two years.

Lim Siyi of OCBC says the bank has re-evaluated how long it will take NOL to return to profit, with the ongoing quarter now expected to remain loss-making.

“Nonetheless, the stabilisation in overall freight rates remain encouraging and we maintain our view that NOL will return to full profitability by the onset of the peak season,” the analyst added.

Windham says his real concern is NOL’s increase in debt relative to the cash generation of the underlying business.

NOL has debt of $3.1bn, up by $1bn over the past year, swelling its gearing from 80% to 136%, Windham notes.

In addition it has $1.9bn in off balance sheet operating leases.

“In our view, it is this large proportion of fixed rate operating losses that are driving worse than peer performance,” Windham said.

“Cash interest expense in FY2012 was just $47mn, implying a cash interest rate of below 1.5% going a long way to explaining how NOL has financed $2.1bn on new vessels over the past two years, while eroding equity value.”

Rigan Wong of Citi, says the weaker than forecast fourth quarter was due to brief but sharp dips in rates.

"We expect NOL to become marginally profitable in FY13E and grow profits consistently to FY15E, as structural improvements in efficiency bear fruit and industry fundamentals turn around," he said.

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