News / NOL sails back into the black, with much more to gain from cheap fuel than rivals

22/01/2015

After quarter upon quarter of reporting net losses, Singapore headquartered NOL will turn a profit this year of more than $200m.

This is according to a leading analyst, who adds that its liner shipping arm, APL, stands to benefit more than its competitors from low bunker prices.

Implying “significant cost savings” from the 60% plunge in fuel prices, broker DBS Vickers analyst Suvro Sarker said in a note to investors: “The fact that NOL has lagged its peers in terms of fuel efficiency and margins in the past means there is more room for improvement, given the razor-thin margins involved.”

DBS has upgraded NOL’s stock from “hold” to “buy” and raised its share price target to $1.10 from 88 cents, while hiking the 2015 earnings estimate to $203m from $46m.

The world’s 11th biggest carrier, APL’s ships burn around three million tonnes of bunker fuel a year and, given the dramatic fall in the cost of fuel in the final quarter, it is probable that NOL had moved into the black in the final period of 2014.

Having incurred $152m of red ink in the first half of the year, NOL paired this down to a third-quarter loss of $23m via a $290m root-and-branch “cost management and efficiency drive” that included off-hiring a number of less-efficient smaller ships.

But NOL was behind the curve of the market leaders in terms of reducing its unit costs, having only recently made the jump to deploying 13,200 teu ships when its top-ranked peers were already gaining slot cost advantage from operating ships of between 16,000 and 18,000 teu.

Now however, as identified by DBS, the unit cost differential is lower at the top end of the ultra-large containership sector, and maximising utilisation levels become more important.

The welcome news for NOL’s management on the turning of the corner for its liner division could well change its strategy on the sale of its “jewel in the crown” asset, APL Logistics, which was to be sold to raise up to a $1bn to prop up the group’s balance sheet.

Meanwhile, most ocean carriers are number-crunching their results for the final quarter of 2014 and the full year, in preparation for publication in February and, notwithstanding having to return some of the benefits of cheap fuel to shippers in the form of reduced bunker surcharges, the results for Q4 should be impressive.

However, in 2015, in the prospects for ocean carriers to reward their shareholders much will depend on how long oil prices remain low and how much of the cost reduction is conceded by carriers in rate-cutting to fill their ships.