Why Has Neptune Orient Lines Ltd. Rallied 4% Today? Is The Market Sensible?


After three years of poor corporate performance, investors seem to be excited about the latest plans of Neptune Orient Lines Ltd. (SGX: N03). News broke very recently that the company is mulling a sale of its logistics business; shares of Neptune Orient Lines had jumped 4.1% in price to S$1.02 as of the time of writing (3:05pm, 20 August 2014) as a result.

The businesses of Neptune Orient Lines

Neptune Orient Lines has two main operating segments: Liner; and Logistics. According to the Wall Street Journal, the company’s logistics business might fetch as much as US$750 million in a sale. However, Neptune Orient Lines has come out stating that it is exploring all kinds of possibilities, including a listing of its logistics arm.

What does this mean for investors in the company and is this really good news?

Some perspective needed

The Liner segment, which involves container shipping, has always been Neptune Orient Lines’ main business in terms of revenue. For instance, in the first half of 2014, the Liner segment was responsible for US$3.57 billion of the company’s total revenue of US$4.33 billion.

But, the Liner segment has been the source of the company’s woes for a number of years. In the first half of the year, Neptune Orient Lines reported Core EBIT (Earnings before Interest and Taxes) of a negative US$112 million for the segment. The Logistics segment meanwhile had earned Core EBIT of US$32 million, a 23% year-on-year increase.

So, if the sale or spin-off of its logistics arm does happen, Neptune Orient Lines would, in essence, be selling off its profitable business to concentrate on its money-losing venture. Before investors get too excited about a possible sale, an important question needs to be asked: What’s the company’s plan for turning around its Liner segment?

The sale of its logistics business can hardly be justified if Neptune Orient Lines does not have a clear plan for improving its Liner segment and/or if the Liner segment’s possible future pales in comparison to the prospects of the Logistics segment.

Everything has a price

That being said, every asset has a price. If the company is able to obtain an attractive selling price for its logistics business, a sale might just turn out to be valuable for shareholders.

Let’s just hope that whatever happens next with Neptune Orient Lines’ Logistics segment would be beneficial for its shareholders over the long run.

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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 any shares of companies mention above