Bloomberg’s 380 Centistoke Bunker Fuel Spot Price Singapore Index (BUNKSI38 Index) is currently trading at 9% below the average bunker fuel prices in 2Q12, which is in turn 11% lower QoQ than in 1Q12. After staying stubbornly high for about a year, bunker fuel prices have finally come off along with the fall in crude oil prices, providing the beleaguered container shipping sector a much needed relief. Shipping consultants Drewry this week said   shipping liners’ successful rate hikes in major global trade lanes meant most liners are now profitable. While eastbound transpacific shipping demand remains strong, the outlook for Asia-Europe routes is still bleak and is unlikely to see a strong peak shipping season this year. Thus, capacity management remains the key to shipping liners’ profitability for the rest of 2012. In addition, Neptune Orient Lines’ (NOL) restructuring to better allocate its capital and reduce its cost base should signal a turnaround in its core business. We maintain our fair value estimate of S$1.38/share and BUY rating on NOL.
Higher freight rates should spell turnaround
Moving in the opposite direction, the Shanghai (Export) Containerised Freight Index (SCFI) in 2Q12 averaged 31% higher QoQ, after a 21% gain in 1Q12. Shipping consultants Drewry this week said shipping liners’ successful rate hikes in major global trade lanes meant most liners are now profitable. And the successful rate hikes are the result of shipping liners’ collective discipline in managing container shipping capacity. For the rest of 2012, capacity management remains the key to shipping liners’ profitability. While eastbound transpacific shipping demand remains strong, the outlook for Asia-Europe routes is still bleak and is unlikely to see a strong peak shipping season this year.
Better allocation of capital and cost savings
Neptune Orient Lines (NOL) last week said it intends to sell its Singapore headquarters building along Alexandra Road so as to release capital for strategic investment. NOL said it has not decided on a reserved price, but media reports say the 29-year old office building is worth ~S$400m. The proposed sale, if successful, will allow NOL to better allocate its capital in its core business of container shipping and logistics.
Maintain BUY
We maintain our fair value estimate of S$1.38/share and BUY rating on NOL.
Source: OCBC Investment Research