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Neptune Orient Lines Has Sunk By 55% In Three Years: Can It Ever Recover?

Neptune Orient Lines (SGX: N03) was once a proud representative of Singapore in the container shipping industry.

Today, it’s a shadow of its former self, having suffered pre-tax losses for three consecutive years between 2011 and 2013. Its latest first quarter results for 2014 also showed no sign of any imminent turnaround with its quarterly losses coming in at US$97.9 million, a far cry from the quarterly profit of US$75.5 million it had earned a year ago.

In a reflection of the sorry state of its business, shares of the shipping firm have sunk by 55% to S$0.98 since the start of 2011. By way of comparison, the Straits Times Index (SGX: ^STI) has actually inched up by 2.7% to 3,275 points in the same time frame.

Neptune Orient Lines currently has two major business segments: Container Liners, and Logistics. The container liner business brings in much higher revenue between the two but unfortunately, is the more problematic one as well.

What has happened in the shipping industry?

The shipping industry has been in a slump for some years now. Prior to the Global Financial Crisis of 2008-09, many large liner companies had over extended themselves in the name of expansion and are now suffering; many of those companies are facing bankruptcy with fleet rates remaining weak. Neptune Orient Lines, though not in a situation as dire as having to declare bankruptcy, is quite clearly not lying on a bed of roses either.

Neptune Orient Lines’ troubles

To give an idea of the magnitude of the troubles facing the company, its container liner business had accumulated more than US$800 million in pre-tax losses between 2011 and 2013. And that’s piled on top of a huge debt load (at last count, the company’s total borrowings stood at US$4.7 billion; in comparison, cash only amounted to US$605 million) and a weak macro environment for the shipping industry.

In light of such figures, it’s perhaps fair to ask: Is Neptune Orient Lines facing a cyclical issue or is the company suffering from a structural problem with its business model. The distinction is important because the former would likely see the company’s business improve once the shipping cycle turns; the latter however, might result in the company’s business never recovering.

Neptune Orient Lines’ response

The company has always prided itself for being a high quality service provider for the shipping industry. However, in an environment where there’s fierce competition stemming from an oversupply of ships, it’s the customers that seem to have more bargaining power. In such a situation, being the lowest-cost service provider might be more important than aiming to deliver higher quality service.

APL, the shipping and container liner arm of Neptune Orient Lines, realized this issue and had announced in January this year that it would be restructuring to ensure that it would be able to compete more effectively in this highly competitive, price-conscious environment. As part of the restructure, APL will be focusing more on cost management and market responsiveness in delivering its services to customers.

The success or failure of APL’s restructuring bears watching from investors: If the company is not able to compete more effectively in this market environment, it might find itself facing even more pressure as its debts pile up.

Elsewhere in Neptune Orient Lines, the company does have a high quality business in its logistics arm. Revenue at the segment has grown from US$1.26 billion in 2010 to US$1.59 billion in 2013; in comparison, revenue at the container liner arm has declined from US$8.29 billion to US$7.33 billion in the same period. Although the logistics business is still relatively small in terms of Neptune Orient Lines’ total revenue, the profits it can generate helps provide much needed support in the company’s quest to turn its container liner business around.

Foolish Summary

Although Neptune Orient Lines can hardly be faulted for the stormy state of the shipping industry’s downturn, cost controls are still within its jurisdiction to a large extent. If it’s not able to control its costs and streamline its container liner business,  it might just find itself having to answer to its creditors before the industry can turnaround.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.