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· We revise up earnings expectations for NOL on the back of lower bunker fuel prices in FY15. · We are not expecting any strong positive momentum on freight rates in near term though. · Sale of logistics division could help bolster balance sheet; lead to one-off disposal gains. · Upgrade to BUY on the back of lower fuel prices, higher US$ exchange rate; TP raised to S$1.10. |
Lower bunker fuel prices could swing NOL into profitability.
NOL could be in for better luck in FY15, with bunker fuel prices declining from US$600/ MT to less than US$300/MT in a little over six months. Given that NOL’s liner business consumes about 3m MT of bunker fuel per year, this implies significant cost savings.
It has to be kept in mind though that part of the fuel price decline will be passed through to customers through lower fuel surcharges and bunker adjustment factors on long-term contracts. However, the fact that NOL has lagged its peers in terms of fuel efficiency and margins in the past means there is more room for improvement, given the razor thin margins involved. This will be aided by the return of 19 expensive chartered-in ships in 2015. We thus revise up our FY15 net profit expectations from US$46m to US$203m.
It has to be kept in mind though that part of the fuel price decline will be passed through to customers through lower fuel surcharges and bunker adjustment factors on long-term contracts. However, the fact that NOL has lagged its peers in terms of fuel efficiency and margins in the past means there is more room for improvement, given the razor thin margins involved. This will be aided by the return of 19 expensive chartered-in ships in 2015. We thus revise up our FY15 net profit expectations from US$46m to US$203m.
US trade lane may hold up relatively better.
While industry freight rates will likely continue to be volatile in 2015, the Transpacific route could hold up better than the Asia-Europe lane, with US economic growth expected to be steady and consumer demand potentially getting a fillip from lower gasoline prices.
While industry freight rates will likely continue to be volatile in 2015, the Transpacific route could hold up better than the Asia-Europe lane, with US economic growth expected to be steady and consumer demand potentially getting a fillip from lower gasoline prices.
If NOL can completed the sale of its APL Logistics, it could register a one-off gain of US$200-250 m. Photo: Inbound Logistics.Logistics division sale could be a one-off catalyst. Press reports have indicated that NOL has received offers from private equity and trade buyers like KKR, CJ Korea Express and XPO Logistics for its APL Logistics arm. Assuming US$80m EBITDA for APL Logistics and a 10x EV/EBITDA multiple, NOL could register a one-off gain of around US$200-250m if the sale is completed.
This would help reduce NOL’s gearing and eliminate the need to raise further equity to bolster its stretched balance sheet. With the revision in earnings and higher US$ exchange rate, our TP is revised up to S$1.10, now based on 1x FY15 P/BV, pegged to mean valuation levels historically in line with higher ROE expectations. Upgrade to BUY.
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