NOL peak season unlikely to yield positive surprise

Medium term outlook also worrisome.

OCBC painted a grim outlook for Neptune Orient Lines, predicting that because of weak market conditions and excess capacity that will prevent it from raising rates, NOL will spend most of the peak season with weak freight rates.

The gap between demand and fleet capacity is only expected to start narrowing in FY15, which makes the medium-term outlook for NOL "worrisome," the research firm added.

Here's more from OCBC:

2Q13 results disappoint. Neptune Orient Lines's (NOL) 2Q13 results disappointed us as weaker-than-expected market conditions caused drastic declines in freight rates on the transpacific and AsiaEurope routes, exacerbating already tepid volume demand. 2Q13 revenue fell 11.5% YoY to US$2.1b and the group registered a core operating loss of US$41m. On a halfyear basis, revenue declined 5.9% YoY to S$4.4b while core operating losses came in at US$127m (vs. -US$212m for 1H12). Only with a US$200m gain from the sale of its headquarters in 1Q13 was the group able to register a net profit of US$41m for 1H13 (vs. -US$371m for 1H12).

Peak season unlikely to yield positive surprise. According to the Shanghai Containerised Freight Index, current freight rates for 3Q13 remain weak across the board. This development does not bode well for NOL, especially with the onset of the peak season. Management has also indicated that general rate hikes so far have yet to close the gap created in 2Q13. In addition, given the weak market conditions and overhang of excess capacity, any further rate increases are unlikely to have a meaningful impact.

Medium term outlook worrisome. With the gap between demand and fleet capacity only expected to start narrowing in FY15, the medium-term outlook for NOL remains worrisome. While downside mitigation lies in the form of disciplined collective industry action, a sustained change in growth demand patterns could render efforts, like the recent P3 alliance, moot. 

Downgrade to SELL. In light of the weaker outlook for 2H13 and beyond, we lower our FY13/14 forecasts accordingly and lower our P/B peg to 0.9x (1.1x previously). Our fair value estimate falls to S$0.95 (S$1.17 previous) and we downgrade NOL to SELL.