NOL efficiency efforts can only do so much: DBS
It cut $100 million in costs through operational improvements but punishing macro conditions will keep pulling its profits down.
According to DBS, returning economic worries in the West, persistently high fuel prices and possible price increase caps will hurt Neptune Orient Lines' revenue generation even as it impresses with its stringent cost reductions.
Here's more from DBS:
Weak results again. 1Q12 net loss of US$254m (not very far from our estimate of US$209m) was an improvement on the S$320m net loss in 4Q11, but well below consensus estimates. Results were impacted by the persistent high bunker fuel prices (up 31% y-o-y on average to US$684/ton). Average freight rate of US$2421 per TEU in 1Q12 was up only 3% q-oq, as Asia-Europe spot rates only moved up from March onwards, and NOL has limited exposure to spot volumes. NOL achieved about US$100m of cost savings in 1Q12 through network optimisation, slow steaming and other initiatives and is on track to achieve its target of US$500m for FY12.
Earnings should improve in 2Q11, as freight rates have moved up in line with a series of general rate increases imposed by the liners on main lanes, and the CCFI index is up about 43% YTD in 2012. Annual transpacific contract negotiations are on and we assume rates to be about 5% higher than last year. But further rate increases will face increasing resistance from shippers. Cracks are also beginning to show in liner discipline, as more capacity comes on stream despite the lack of clear signs of a strong volume recovery.
But profitability will be fragile at best. We lower our full year net loss for FY12 to US$154m from US$197m previously to account for costs savings, but cut our FY13 net profit estimate by 16% to reflect growing uncertainties. Given the renewed economic and political uncertainties in the US and EU, specter of sustained high fuel prices and potential freight rate moderation in coming months, sentiment in the sector could be weak in the near term.
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