Neptune Orient Lines (DBSVickers)

FULLY VALUED S$1.45 STI : 3,171.55

Price Target : 12-month S$ 1.25

DBSV vs Consensus: FY11-12 EPS below consensus, owing to lower freight rate assumptions.

NOL Period 6 operating data:rates continue to slide

Freight rates continue downward slide in June. Period 6 is the first month where rates usually reflect the initial effect of the recently concluded annual Transpacific contract renegotiations. Thus, the fact that average revenue per FEU in Period 6 slid further down 2% compared to Period 5 and was down 13% y-o-y to US$2,513 indicates that in addition to the continuing weakness on the Asia-Europe trade lane, Transpacific rates are also down y-o-y, probably to the tune of 5-10%. Average freight rates for NOL in 2Q11 stood at about US$2,540 by our estimate, down about 2.3% compared to the 1Q11 average rate of US$2,599 per FEU.

Volumes remain intact. For the 4 weeks of Period 6 2011 (4 Jun to 1 Jul 2011), NOL reported container volumes of 232,700 FEUs - up 5% y-o-y and 2% m-o-m - on the back of sustained higher trade volumes on the Intra-Asia trades, which we had identified as the high growth segment in our recent container shipping sector report. For 2Q11, volumes were up 7% y-o-y to 691,800 FEUs. Thus, the volume trend still implies decent growth over FY10 numbers, but it remains to be seen whether the unfolding economic events in EU and US affect demand in 2H11. Overall, volume growth is not as much a concern to sector dynamics as the influx of supply of mega vessels - especially into the Asia-Europe trade lane and potential cascading of supply into other trade lanes.

Losses could be higher in 2Q11. As we have highlighted earlier, NOL should be reporting earnings going deeper into the red in 2Q11, compared to the US$10m net loss recorded in 1Q11. However, given the slightly weaker than expected rates data for Period 6, the loss could be higher than we had earlier estimated and could be somewhere close to US$50m in 2Q11. Thus, there could be potential downside to our current earnings estimates, and we will review our numbers in greater detail after NOL reports 2Q11 results on 12th August. Given that we are already significantly below consensus earnings estimates, we think there could be further downgrades from the street in coming weeks. Maintain FULLY VALUED, with TP of S$1.25.