Not yet time for NOL to rejoice over 3Q12 turnaround

NOL posted first net profit in seven quarters but still net loss for FY12.

Neptune Orient Lines (NOL) finally reported a profitable 3Q12 after six consecutive quarterly losses. Its revenue grew 4.0% YoY to US$2.3b (vs. +6% forecast) on higher volumes while its core EBIT improved to US$74m – a much better showing versus–US$72m in 3Q11 and marginal gains of US$16m in the previous quarter.

OCBC Research notes that the better performance came largely on the back of significant cost savings from its Efficiency Leadership Programme (ELP) as freight rates remained lacklustre despite the peak season impact.

Nevertheless, OCBC cautioned that demand remains weak and thus affecting full-year performance.

Here's more from OCBC:

NOL announced a US$50m PATMI, against a loss of US$91.1m the same period a year ago. Cost savings at 72% FY12 target On a YTD basis, NOL's ELP has saved the Group US$360m, well on its way to achieve its US$500m target for the year. Although the bulk of the programme (~44%) is targeted at bunker-related costs, it is - in itself - a capacity issue as well.

For instance, by utilizing fewer but larger and more fuel-efficient vessels, NOL reduced fuel consumption cost by 8% even with a 3% increase in volume for 9M12. As demand remains weak, managing container shipping capacity is still the main driver for maintaining profitability, and collective efforts thus far - e.g. withdrawal of routes - are paying off slowly.

With 29 chartered vessels expiring between 4Q12 and 2014, NOL is in an optimal position to manage capacity more effectively. As for rates, although NOL is now in the seasonally weaker 4Q12, recent data from the Shanghai Containerized Freight Index has been encouraging with only slight dips in freight rates across the main trade routes (with the exception of Asia-Europe).