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MITA No. 010/06/2009 MITA No. 010/06/2010
Previous Rating: BUY
Neptune Orient Lines Ltd
Poised to leverage on a rising tide
Current Price: Fair Value:
4000 3500 3000 2500 2000 1500 1000 M ay-08 M ay-09 S ep-08 S ep-09 M ay-10 Jan-08 Jan-09 Jan-10 S ep-10 NOL STI
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5
Reuters Code ISIN Code Bloomberg Code Issued Capital (m) Mkt Cap (S$m / US$m) Major Shareholders Temasek Holdings Free Float (%) Daily Vol 3-mth (‘000) 52 Wk Range
NEPS.SI N03 NOL SP 2,583 5,114 / 3,687 67% 33% 16,315 1.510 - 2.350
The tides are turning. We attended the annual Marine Money conference over the past week, where participants were generally cautiously optimistic over the container shipping industry's outlook. Liners are widely expected to post a recovery in 2010 following huge industry-wide losses in 2009; and while freight rates are expected to soften in 2011, the pullback is expected to be contained and rates should not plunge to the unprofitable levels seen during the crisis last year. Global GDP, a key leading demand indicator, is expected to grow by 4.6% in 2010 and 4.3% in 2011 following a 0.6% contraction in 20091. Coupled with positive economic data such as higher-than-expected US retail sales and a pick up in manufacturing activity, demand for container trade is poised for a rebound. Neptune Orient Lines (NOL), which counts itself among the top five global liners by fleet size2, is well positioned to leverage on this recovery. A delicate balance of demand and supply. Freight rates have rebounded strongly in 2010 thanks to inventory restocking, slippage and a shortage of container boxes. Moving forward, maintaining the delicate balance of vessel demand and supply will be key to how freight rates pan out. On the supply side, the order book for containerships has been estimated to have contracted to 28% of total fleet, a significant improvement from the 40% seen pre-crisis. The bulk of deliveries have been scheduled for 2011 and 2012. The order book shrinkage bodes well for liners as it eases capacity overhang worries. On the demand side, most market watchers anticipate positive, albeit moderating growth in 2011, and this should continue to support trade flows. Liners have so far proven able to act swiftly to restore the demand and supply equilibrium, and industry discipline remains crucial in ensuring freight rate stability in 2011. Leveraging on exposure to high growth markets. Our confidence in NOL is further buoyed by its exposure to high growth markets. This appears to have been overlooked by the market. Asia and US each account for 40% of the group's volume, while Europe forms the remaining 20%. Robust Asian trade flows and brightening US economic prospects could propel NOL's recovery ahead of its peers. Our projections and S$2.41 fair value estimate (based on 1.46x blended FY10/ 11F NTA, in line with its previous recovery phase) remain intact. We maintain our BUY rating on NOL.
(US$ m) Revenue Gross Profit EPS (US Cts) PER (x) P/NAV (x)
FY 08 9,285.1 956.1 5.6 25.5 0.9
FY 09 6,515.6 -20.4 -28.7 N.A. 1.3
FY 10F 8,667.2 866.7 7.5 19.2 1.3
FY 11F 9,939.6 1192.7 13.1 10.9 1.1
Lee Wen Ching (65) 6531 9806 e-mail: firstname.lastname@example.org
IMF, OECD, The Economist via Clarkson Research http://www.alphaliner.com/top100
Please refer to the important disclosures at the back of this document.
Given that container trade demand is closely correlated to GDP growth.5 in July to 56.3 in August (exhibit 2). Exhibit 1: US Retail Sales Source: Briefing. US retail sales have outperformed expectations. suggest that the risk of a double-dip recession is low.6%. the ISM (Institute for Supply Management) Manufacturing Index rose from 55.4% in August after rising 0. coupled with the projected growth of global GDP. whereas a sub-50% reading indicates contraction. increasing 0. A reading of over 50% indicates expansion relative to the prior month. Excluding autos. we anticipate rosier prospects for the liner industry. core retail sales grew by an even more impressive 0.3% in July (exhibit 1). These leading economic indicators.Neptune Orient Lines Ltd Leading economic indicators paint a rosy picture.com Page 2 1 October 2010 . Meantime.com Exhibit 2: ISM Index Source: Briefing.
Neptune Orient Lines Ltd Poised to leverage on the rising tide. which could threaten to derail the delicate vessel demand and supply equilibrium. Such large vessels provide benefits such as lower unit costs thanks to economies of scale. We note that the group has two 10.700-TEU (twenty-foot-equivalent unit) container ships due for delivery in 2012. On a company-specific level. NOL's fleet profile may potentially expose the group to vulnerability in terms of deployment inflexibility. Exhibit 3: Ranking and market share of top 30 liners Source: Alphaliner Risks. therefore exposing operators to potential demand shocks. The group is poised to leverage on global trade rebound. NOL ranks fifth among the global containership industry in terms of fleet size and accounts for approximately 4. and US (40% of volume) where economic prospects appear to be brightening. backed by its exposure to Asia (40% of total volume) where growth remains robust. Page 3 1 October2010 . but their deployment tends to be less flexible due to the large size.1% of total market share (exhibit 3). Risks facing the container shipping industry include slower than expected economic growth and accelerated vessel delivery.
Neptune Orient Lines Ltd Exhibit 4: NOL's vessel commitments Source: Company Page 4 1 October 2010 .
7) 108.0 0.8 1.1 504.9 1.5 2.796.0 137.1 -34.5% 0.1% 3.7 -564.2 KEY RATES & RATIOS EPS (US cents) NAV per share (US cents) EBIT margin (%) PBT margin (%) Net profit margin (%) PER (x) Price/NAV (x) Dividend yield (%) ROE (%) Net gearing (%) FY08 5.950.939.6 5.340.1 FY09 6.940.444.7% FY10F 7.3 -9.6 -134.8 3.244.496.4 429.667.7 -140.0 558.2 FY11F 704.6% 4.9 -644.8 FY10F 8.2 2.9 4.1 -792.6 FY09 333.2 333.840. taxes and interest Net cash from operations Purchase of PP&E Other investing flows Investing cash flow Financing cash flow Net cash flow Cash at beginning of year Cash at end of year FY08 498.515.2 920.7 192.6 167.6 -89.3 1.3 939.6 2.0% 6.4 5.351.1 83.2 FY09 -269.284.222.6 1. plant.2 3.9% FY11F 13.5 -56.500.3 5.5% 2.5 114.1 -75.0 1.8% 10.0 2.6 225.4% 10.1 3.2 5.2 866.8 FY11F 9.8 -879.0 -38.192.5% 12.6 FY10F 558.6 5.509.3 302.1 -141.2 429.6 5. Working cap.0 558.1 333.8 4.5 3.4% 33.642.6 -20.0 0.1 124.9% 2.461.1 16.496.504.3 0.A.909.003.0 -843.8 1.5% 21.1 -739.8% 1.8 1.1 457.5 BALANCE SHEET As at 31 Dec (US$m) Cash and cash equivalents Other current assets Property. equipment Total assets Debt Current liabilities excluding debt Total liabilities Shareholders equity Total equity Total equity and liabilities FY08 429.0 527.3 3.4 5.2% 19.333.4 2.9 362.7 569.0 164.1 201.4 -700.5 0.3 349.9% 25.2 2.3 FY11F 920.1 956.4 403.460.2 1.0 -140.7 -735.9 8.199.0% -26.624.444.3 5.4% N.2 1.1 939.1 268.0 36.3 3.1 406.2 1.1% FY09 (28.0 FY10F 545.7% -11.0 -67.1 CASH FLOW Year Ended 31 Dec (US$m) Op profit before working cap.3 -59.337.909. 1.4 9.5 2.493.1 1.0 -140.9 0.2 2.4 8.1 251.468.6 939.7 5.4 3.2 88.9 339.Neptune Orient Lines Ltd NOL's Key Financial Data EARNINGS FORECAST Year Ended 31 Dec (US$m) Revenue Gross profit Net op expenses EBIT Finance cost Associates / JVs PBT PAT Minority interests Net profit FY08 9.6 -56.4 -623.6 1.3 3.0% 3.7 -740.9 499.2 1.309.2 -550.5% 0.171.9 -140.061.6% Source: Company data.1 -73.285.411.1 5.340.4 -96.9 3.8 5.9% -10. OIR estimates Page 5 1 October2010 .3 1.3 -281.1 1.6 2.6 1.
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