By Lee Wen Ching
Wed, 3 Feb 2010, 09:14:45 SGT

The global shipping industry has increasingly been showing signs of a recovery with improving freight rates and volumes. Order cancellations of new vessels have also helped to stem overcapacity problems. Coupled with the improved economic outlook, demand and supply fundamentals could experience some tightening in 2010. This bodes well for Neptune Orient Lines (NOL). The group ended 2009 on a good note with a 7.4% YoY and 46.9% PoP (period-on-period) increase in container shipping revenue to US$684.1m – the second highest level recorded in two years - aided by robust volume growth. We are keeping our estimates intact pending the group’s FY09 results due 11 Feb, during which management’s guidance will be crucial in setting the tone for its outlook. Our HOLD rating remains, while our fair value estimate has been raised to S$1.63 (previously S$1.48) as we raise our peg to 1.1x FY10F NTA (from 1.0x) on the improved outlook.

Light at the end of the tunnel? The shipping industry has seen a string of optimistic news flow of late. Freight volumes appear to have bottomed out, industry experts are unanimously forecasting higher freight rates in 2010, liners are turning increasingly sanguine, and some market watchers are predicting that shipping lines could return to the black in 2010 after suffering an estimated US$20b of losses in 2009. Such encouraging signs bode well for Neptune Orient Lines (NOL), which has been in the red since 4Q08. While management has predicted that losses could persist till at least 1H10, we expect losses to narrow in FY10 as compared to FY09, buoyed by improved prospects in 2H10 as well as concerted efforts by the global shipping industry to curb losses. Order cancellations of new vessels have also helped to stem overcapacity problems. Coupled with the improved economic outlook, demand and supply fundamentals could experience some tightening in 2010.

Good end to 2009, sustainability is the main wild card. NOL ended the year with an encouraging set of operational data in Period 12 (P12), 2009. Container shipping revenue grew 7.4% YoY and 46.9% PoP (period on period) to US$684.1m – the second highest level recorded in two years. Revenue recovery was driven by a strong rebound in shipping volume (up 43.3% YoY and 50.2% PoP), partially offset by continued weakness in freight rates (down 25.1% YoY and 2.2% PoP). While NOL’s P12 performance came as a pleasant surprise, we refrain from turning bullish at this juncture as it remains to be seen if such volumes can be sustained. Furthermore, freight rates remain in the doldrums and still have some way to go before reaching break-even levels.

Awaiting concrete signs of recovery; maintain HOLD. We are keeping our estimates and HOLD rating intact pending the group’s FY09 results due next Thursday, 11 Feb 2010. Management’s guidance will be crucial in setting the tone for its outlook. In view of the improving operating environment, we have lifted our valuation peg to 1.1x FY10F NTA (from 1.0x), deriving a fair value estimate of S$1.63 (previously S$1.48). We do not rule out the possibility of further upward adjustments should NOL display concrete signs of a recovery. The stock is currently trading at 1.2x FY10F NTA, below the 1.46x it traded at during recovery phase in 2003.