By Lee Wen Ching
Tue, 29 Jun 2010, 09:55:22 SGT

Recent data reaffirms our expectation for Neptune Orient Lines (NOL) to return to profitability in FY10. The group posted a 33.6% YoY increase in volumes recorded from 1-28 May coupled with a 19.0% jump in average freight rates, bringing revenue up 59.0%. Year to date, we estimate that container shipping revenue has surged 51.5% YoY. Stronger-than-expected peak season Transpacific demand has prompted liners to reactivate previously idled capacity and implement peak season surcharges, signalling that liners are regaining their bargaining power amid tighter demand and supply fundamentals. Going forward, we expect positive economic developments in US, Asia and Middle East, which together account for 80% of the group’s volumes, to support its recovery. Maintain BUY with S$2.35 fair value estimate. Key catalysts include a return to profitability, which we anticipate could happen as soon as 2Q10, as well as strong operating data.

On track to return to profitability in FY10. Recent data reaffirms our expectation for Neptune Orient Lines (NOL) to return to profitability in FY10 following six consecutive quarters of losses since 4Q08. The group recently reported a 33.6% YoY increase in shipping volumes recorded between 1 May and 28 May, or Period 5 (P5), buoyed by higher Intra-Asia and Transpacific volumes. Average revenue per FEU (Forty-foot Equivalent Unit) rose 19.0% YoY thanks to improved core freight rates, bringing revenue up 59.0% YoY. Year to date, volumes have jumped 41.0% YoY and average freight rate has risen 7.4% YoY, lifting the group’s container shipping revenue by 51.5% as compared to the same period a year ago.

Transpacific demand on the rise. Annual Transpacific contract negotiations appear positive, with CEO Mr Ron Widdows expressing confidence that freight rate increases should lift these trades back to a “small profit” after huge losses sustained in 2009-2010. The Transpacific Stabilization Agreement (TSA) reported a 24.1% YoY increase in traffic to the US West Coast in May 2010, while the National Retail Federation forecasts an average 12.6% YoY increase in retail import shipments through US container ports in Jun-Oct 2010. Stronger-than-expected peak season demand has spurred liners to implement peak season surcharges and reactivate previously idled capacity - a sign that liners are regaining their bargaining power amid tighter demand and supply fundamentals. According to AXS Alphaliner, more than 37,000 TEU (Twenty-foot Equivalent Unit) of vessel capacity was reactivated in Apr and May, bringing idle global containership capacity to its lowest level since Dec 2008.

Maintain BUY - US, Asia and Middle East to support recovery. NOL yesterday successfully established a US$1.5b medium term note programme, proceeds of which will be used for general corporate purposes. The issue enhances its financial flexibility in the event that credit markets become constrained. Recent Euro zone worries have created an overhang on the stock, which has fallen by 12% from its recent peak. We believe that negatives have been reflected at current levels and highlight that the positive economic developments in US, Asia and Middle East, which together account for 80% of the group’s volumes, will support the group’s recovery. We maintain our BUY rating on NOL and keep our fair value estimate at S$2.35. Key catalysts include a return to profitability, which we anticipate could happen as soon as 2Q10, as well as strong operating data.