Shipping industry turns...or is it?

Shipping industry starts to turn- The Edge

The US economy is on the mend. So says Emil Wolter, head of regional strategy, Asian markets at RBS, who prefers to play developed market growth over emerging market growth. He is forecasting that US unemployment is going to fall to 8% from 10%. That would support a continued recovery in US consumption. As a consequence, global trade is poised to rebound by 6-8% in the next 12 month, Wolter says. While the shipping sector has supply issues, Wolter says “You can buy a lot of these companies at their NAVs and although some companies have problems with their balance sheets, there are also a lot of companies with strong balance sheets.” Moreover, pricing power is returning, and the shipping companies are operating more efficiently too.

That’s a view that Survo Sarkar, an analyst at DBS Group Research, agrees with. In a 32-page report on Neptune Orient Lines, DBS has re-initiated coverage with a price target of $2.40. According to Sarkar, the figure represents seven times FY11 EV/EBITDA, (enterprise value to earnings before interest, tax, depreciation and amortisation) and a price to book of 1.6 times. These valuations are conservative compared to peers’ average of about 10 times FY11 EV/EBITDA, the report says.

According to the report fundamentals for the shipping sector are indeed turning increasingly positive. “Year to date, container rates and volumes have both made a strong comeback — with rates on Asia-Europe routes now about 70% higher than last October levels,” Sarkar writes. NOL’s operating statistics for the first 10 weeks of FY10 reflect the improved fundamentals, the report says. Volumes have risen 52% y-o-y, and freight rates are up 7% and 10% on a sequential basis in the first two reporting periods, it adds. “According to our estimates, NOL’s container shipping business should return to profitability by 4Q10, on the back of 9% growth in trade volumes, a 10% growth in average freight rates/FEU and a 3% drop in average operating expenses/FEU for FY10,” Sarkar states in the report. NOL last traded at $2.01.

Elsewhere, Kim Eng Research is bullish on Singapore Airlines and is raising its target price to $18.90 from $16.20 earlier because of improved assumptions for passenger loads from FY11. Analyst Rohan Suppiah believes that higher visitor arrivals into Singapore, a recovery in the global aviation sector and a rebound in premium travel should underpin better yields. SIA last traded at $15.20.

ML's Take:

Send out an email on shipping about 2 weeks back saying the same thing. However, after talking to insiders from the market, any freight rate is unlikely to be sustainable unless economic activities jump up strongly. This is because there is still alot of idle capacity which ship owners can activate.

Hence, for counter like NOL, its a buy on weakness in the short term, but also a sell on strength whenever the price rally. Not a buy and hold strategy yet for now.

This blog is a selections of my investment views to my client. If you find it useful or have additional information to share, please do let me know. These blogs are my personal views and is not meant to solicit any sales or investment on any securities or investment. I may have vested interest in some of the counters or investment products, hence please invest at your own risk. As usual invest in what you understand and do your own homework.

ML is a licensed stockbroker with one of Asia Leading Stock Brokering firm.