Neptune Orient Lines Ltd (OCBC)

Maintain HOLD
Previous Rating: BUY
Current Price: S$1.79
Fair Value: S$1.95

Shipping rates to remain depressed

Volume up but average revenue remains depressed. Neptune Orient Lines' (NOL) recently announced that its container shipping operating performance for the period between 9 Apr and 6 May saw an increase in container shipping volumes of 9% YoY on the back of higher volumes carried on the IntraAsia and Asia-Europe trade lanes, while YTD volume increased by 9% YoY. Despite the increase in volumes, average revenue per Forty-foot Equivalent Unit (FEU) actually fell 4% YoY due to lower rates on the Asia-Europe trade lane although YTD average revenue per FEU rose slightly by 1% YoY.

Shipping rates to remain under pressure. Although average weekly shipping volumes are expected to increase in the seasonally stronger 3Q and 4Q, we anticipate average revenue to continue experiencing downward pressures due to depressed shipping rates arising from increased competition amongst container ship carriers and a potential over-supply of container ship capacity. Despite the general increase in fuel prices in recent months, the consistent fall in shipping rates across the industry amidst increasing volume points to carriers being under pressure to fulfill utilization targets. While there has been talk that shipping rates will be renegotiated upwards, we believe that significant upside is limited on account of a weakening global economy, and will at most, revert to average breakeven levels per FEU for the industry. Furthermore, NOL's rival, AP Moller-Maersk, postponed its proposed rate hike for the Asia-Europe trade route on account of a weak demand and market resistance.

Weakness to persist; maintain HOLD. We believe that the market has taken into account recent developments with NOL's share price falling by more than 24% from its 52-week high of S$2.38 on 6 Jan to its current value of S$1.79, and underperforming the Straits Times index, which fell only 4% in the same per iod. Whi le we expect shipping volumes to maintain at relatively decent levels on seasonality factors, any anticipated volumes increases will be insufficient to offset lower shipping rates. In addition, the recent spate of disappointing macro-economic data point to a moderat ion of recovery expectations and may potentially hinder inventory levels and subsequently affect shipping volumes. Given the above factors, we reiterate our view that prospects for NOL in FY11 are not as rosy. We have adjusted our FY11 estimates down further, lowering freight rate growth by 2% as we envision an almost flattish level due to increased competition and the inability to raise rates significantly. We reduced our fair value estimate from S$2.05 to S$1.95, based on the 5-year historical P/B average of 1.2x, but maintain our rating of HOLD.