Drewry: What Will it Take to Sell NOL?

The rumoured sale of Singapore-based container shipping company Neptune Orient Lines (NOL) will not go down smoothly as the company’s majority stake owner – Temasek Holdings – is unlikely to accept a low-ball price for this ‘habitual loser,’ according to shipping analyst Drewry.

Temasek Holdings, the Singapore government’s investment company, has shareholdings in almost every line of business from multinational banks to wildlife reserves with a net portfolio value of USD 194 billion. It generated net profit of USD17.5bn in its last financial year ended 31 March 2015 and provided a 19% one-year return to shareholders.

The average return since inception in 1974 is 16%. NOL’s prolonged period of losses have not put a scratch on the Temasek juggernaut and the latter is certainly under no pressure to enter into a fire sale, Drewry says.  NOL only ranks 38 out of 45 among Temasek’s major investments in terms of market capitalisation.

NOL’s current stock price put’s a valuation of about USD 1.83 billion (as of 24 July, 2015) on the company, which is substantially below its book value of USD 2.6 billion after adjusting for gains on the APL Logistics sale. Total debt before the recent divestment stood at around USD 4.70 billion meaning that Temasek would have to take a bit of a hit, according to Drewry.However, even after a 2009 rights issue and the sale of APL Logistics this year NOL’s debt pile is considerable and according to Drewry Maritime Equity Research the company will need a further capital injection that Temasek would have to back were it to hold on to the company. Some may see that as throwing good money after bad, particularly as the container market is not expected to pick up in the short-term, Drewry says.

Temasek therefore may feel added pressure in this election year to offload underperforming companies with somewhat gloomy outlooks from its roster. Even then it would not want to be seen to be giving away the national shipping line on the cheap through a distressed sale.

The national interest argument for keeping NOL would be flawed in Drewry’s opinion. Singapore is one of the best served countries in the world, regularly featuring near the top of logistics and liner connectivity KPIs produced by the likes of the World Bank and UNCTAD. NOL helped to make Singapore the shipping hub it is now but losing the company wouldn’t jeopardise that status. Therefore, Drewry believes that if Temasek is interested in selling NOL it would be for cold business reasons, unclouded by sentiment.There is one good reason for Temasek to stick with NOL. As full owner of container terminal operator PSA International it could use NOL, and its G6 Alliance partners, to utilise Singapore’s new 65-million teu pa capacity mega-port at Tuas, first-phase (25m teu pa capacity) scheduled to be ready in six years, Drewry says.

If NOL were available to buy, either outright or partially, what would the buyer get? Putting aside its recent track record for losses and debt, NOL does have some terminals in Asia, the US and now Europe that are included within its APL liner division. APL has 56 owned ships, (plus another 40 or so that it charters-in) with the largest being its 10 x 14,000 teu units. The company has not joined the rush for Ultra Large Container Vessels (ULCVs) of 18,000 teu and above and is only one of four “Top 20” carriers that do not have any newbuilds on order – the others being CSCL, Zim and Wan Hai.While its biggest ships are still young they were relatively expensive – NOL’s 14,000 teu ships cost USD 130 million each, whereas Maersk has just agreed to pay about USD 122m each for nine units of the same size. They are not much of a pull as other carriers are really only interested in ULCVs and the economies of scale they offer in the currently over supplied market, Drewry says.

Another barrier to sale is that there are very few carriers with the ready resources. OOIL/OOCL is one that could although a recent USD 952m order (to be 70% financed by new bank finance that would still leave it with a sizeable war chest) for six 20,000 teu ships suggests it is taking the organic growth approach.

Maersk Line is another with deep enough pockets but both it and 2M partner MSC are already very close to the market share threshold allowed by EU competition regulators and even APL’s relatively small presence in the Asia-Europe trade could tip it over, Drewry says.

A left-field option of keeping NOL in Singapore by way of sale to PIL looks even more unlikely now that it is reportedly about to place an order for up to eight 9,400 teu ships from China.

Drewry says there are several obstacles to a full sale of NOL: its parent company is not under pressure to sell and is unlikely to accept a low price, there are few willing buyers, and its fleet is not an attraction. More likely, Temasek will remain as a substantial shareholder after either a direct stake sale or indirect stake sale through Lentor.