Excerpts from analysts' report

Barclays analysts: Jon Windham, CFA & Esme Pau


apl_inboundlogistics8.14APL Logistics is a unit of NOL. Photo: Inbound Logistics.We upgrade our rating for Neptune Orient Lines (NOL) to Overweight from Equal Weight as we now see value emerging after the 20% decline in share price since the announcement on 21 August of the potential sale of its profitable logistics unit (vs CSCL and the STI both flat over the same period).

NOL is trading at 0.8x 2015E P/B, a three-year trough despite our expectation for a sequential earnings recovery in 4Q14 and 2015 on the back of lower oil prices.

We lower our 12-month price target by 8% 
to S$0.95 (from S$1.03) and roll forward our unchanged 1.0x target P/B multiple to our revised 2015E BVPS estimate of S$0.95. We lower our estimate for 2014 to a loss of S$0.08/share (from EPS of S$0.03) and lower our 2015-16 EPS estimates by 47-73% to reflect lower freight rates than we expected.


 
Earnings recovery in 4Q14-2015E: We revise down our 2014-16E estimates to incorporate our lower freight rates expectations, higher finance cost and lower operating costs. We expect NOL to break even in 4Q14, driven by lower fuel costs; the bunker price declined 22% y/y in November. NOL has lagged peers in reducing fuel consumption per box and, therefore, should stand to benefit more than average from lower fuel costs, in our view. NOL’s unit costs have declined only 13% since 2011 compared with an average improvement of 23% for CSCL and COSCO Container Lines. We forecast EPS of S$0.02 for 2015E from a loss of S$0.08 for 2014E.
 
Value emerging: NOL’s current P/B premium to CSCL (OW), its closest peer in the container shipping space, has narrowed to 3%, below the two-year average of 40%. In our view, NOL’s share price has been depressed by the proposed sale of its logistics unit (18% of 2013 revenue) and disappointing YTD 3Q14 losses of S$0.09/share from weak freight rates and slower-than-peer cost cutting. However, we see upside potential from an expected 4Q14 earnings recovery on lower fuel prices.
 
Upgrade to OW: As we expect a near-term earnings recovery and NOL’s valuation premium to regional peers has narrowed, we take the opportunity to upgrade to OW. However, we still expect NOL to produce lower-than-industry-average returns in 2015.

A key risk to our price target is the potential for external financing due to NOL’s high leverage. Within the AEJ container shipping space, we prefer OOIL (OW) due to its consistently better results and lower gearing; it is currently trading at 0.7x 2015E P/B.

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