NOL, cimb maintain UNDERPERFORM with target price $1.30
-NOL today announced aggressive cost reduction initiatives as it
wrestles
with the impact of the global economic downturn. This is a positive
surprise. On 21 October, NOL announced that it was reducing Asia-Europe
capacity by 25% and transpacific capacity by 20% from November, which
is
expected to reduce vessel network costs by about US$200m in 2009 (when
including savings on fixed vessel and charter-hire costs). Today¡¯s
announcement is in addition to these capacity cuts, with the highlights
as
follows Retrenchment of the group¡¯s global workforce of about 1,000
positions with the largest impacts being in North America, where the
company’s cost base is highest, including 50 positions in the Singapore
office. The bulk of the staff reductions will be in non-customer facing
roles; Relocation of the Americas¡¯ regional headquarters from Oakland,
California to a more cost effective location elsewhere in the United
States; Changes in the way APL Logistics manages its business to create
efficiencies and clearer line of sight of roles and accountabilities;
Additional business adjustments in Europe and other Asian regions; and
Continuing strong focus on productivity measures to reduce operating
and
overhead costs.
-These measures are likely to result in a US$33m restructuring charge
in
the 4Q08 results, and additional charges in 2009. CEO Ron Widdows
justified
the measures by saying that the current industry downturn was not only
unprecedented, but also beyond a normal cyclical downturn¡± and
expected
challenging conditions to persist for the next few years.
-Maintain UNDERPERFORM and target price of S$1.30 for now; forecasts
and
target under review. Our target price is based on an unchanged trough
valuation of 0.5x P/BV. NOL¡¯s historic P/BV range is between 0.5x to
2.5x.
-While we are positive on the measures announced by NOL, the cost
cutting
initiatives may not be able to offset the severe top-line pressure at
the
Asia-Europe trades, and also the transpacific and intra-Asia trades
moving
into 2009.
-For 2007, staff costs and employee benefits came to US$576m, or just
7% of
group revenue. Hence, the planned 10% cut in the workforce at the
minimum
should help reduce costs by some 0.7% of revenue ¨C which is not a lot
when
Asia-Europe spot rates have collapsed 70-80% yoy. The US$200m savings
from
capacity cuts could be more significant, but with NOL guiding for a
grim
outlook for 2009 profitability, it may still not be enough to keep NOL
in
the black. As a result, we believe that our forecasts need further
downward
revision, likely into losses for the next two years.
-Downside catalysts include falling container rates and declining
container
volumes as the global economies synchronously decelerate into 2009. Our
base case in-house economics view is for a recovery in 2010, but the
probability of our bear case forecasts for continued GDP contraction in
2010 are increasing. Together with record newbuilding deliveries next
year,
the container shipping industry could in turmoil for a while yet.