Excerpts from analysts' report

eugene_chua1.2015OCBC Investment Research analysts: Eugene Chua (left) & Andy Wong, CFA

Lower bunker costs not enough to overcome tough year ahead

Management expects overcapacity in the liner industry to persist and the port congestion in U.S. West Coast remains a risk factor. The port congestion added US$15.0m in incremental costs during 4Q14.

While we think lower bunker price is good for NOL in the near-term, we remain cautious as competitors may make use of lower bunker price to adjust freight rates in the longer term.

We also note that NOL now has a leaner fleet with more fuel-efficient vessels (i.e. lower bunker consumption) with no new deliveries expected in FY15.

Hence, while the impact from lower bunker costs and lower bunker consumption is positive, it is likely to be offset with depressed yields expected in FY15 on overcapacity reason.

We also expect management’s continuous focus on operational efficiencies and good cargo yield management for key trade routes to improve liner segment’s margins.

NOL_chart2.15"NOL’s FY14 results were slightly below our expectation as its US$259.8m net loss came in higher than our forecast of US$250.0m net loss, but is way above the street’s forecast of US$100.5m net loss," says OCBC Inv Research. Chart: BloombergDowngrade to SELL 

Taking into account the lower bunker costs and other factors above, we bump up our FY15 forecast from –8.6 US-cents to 0.4 US-cents and introduce FY16 forecasts.

Consequently, we increase our FV from S$0.84 to S$0.92 based on 1.0x FY15F P/B (0.25SD below 5-year mean).

Given a 22.3% rally in its share price over the last two months, we downgrade NOL from Hold to SELL.  

DBS Vickers says:

NOL recorded higher-than-expected net loss of US$85m in 4Q14, as freight rates continued to be volatile. However we noted a decline in operating expenses per FEU (40-foot equivalent unit) in 4Q14. 

Further cost improvements expected in FY15 on the back of lower oil prices and fleet optimisation. Possible sale of logistics division could help bolster balance sheet; lead to one-off disposal gains. 

Maintain BUY and S$1.10 TP.

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