Is Neptune Orient Lines Ltd Finally Turning The Corner?

Neptune Orient Lines Ltd (SGX: N03) has had a pretty rough time these past few years.

The shipping outfit has not only seen its share price drop by more than half from around S$2.30 at the start of 2011 to S$1.01 currently, its business has been under immense pressure as well, clocking cumulative losses of US$1.23 billion from 2011 to 2014.

However, the company seems to have found a silver lining of sorts over the past few months.

Oil, a major cost for the shipping firm, has seen its price collapse by more than half since June 2014. Meanwhile, the company had also proposed a deal last month to sell off its Logistics arm (Neptune Orient Lines has two business segments; Liner and Logistics) so as to raise capital to repair its balance sheet and simplify its operations. Most recently, there were even rumours that the firm could be acquired by its competitors.

These good news seemed to have buoyed the market’s confidence in the future prospects of Neptune Orient Lines; since the start of 2015, the shipping outfit’s shares have gained some 20%, far exceeding the SPDR STI ETF’s (SGX: ES3) meagre 1.5% return over the same period. The SPDR STI ETF is an exchange-traded fund which tracks the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI).

This sharp rise in Neptune Orient Lines’ shares raises the question: Is the company really turning the corner or has the market run ahead of itself?

Let’s see. For the whole of 2014, Neptune Orient Lines had suffered a loss of US$260 million. In fact, if it were not for the company’s Logistics arm, those losses would have been even greater.

Given the impending sale of Neptune Orient Lines’ Logistics arm and the fact that the Liner segment had already logged four consecutive years of losses, there’s a possibility that the company’s losses for the whole of this year would be worse.

But it’s not all doom and gloom. In 2014, the Liner segment’s core EBIT (earnings before interest and taxes) actually improved from –US$234 million in 2013 to –US$143 million. If the trend can continue, then brighter days may just be ahead.

For now though, it is hardly a time for investors and management to be cheering.

The company still has a weak business and a weak balance sheet; even after the Logistics arm is sold, Neptune Orient Lines’ pro-forma net gearing ratio (net borrowings over total equity) is still high at 1.08.

Moreover, speculation of a takeover and lower oil prices may just be temporary uplifts for Neptune Orient Lines that do not signal any sustainable long-term improvement in the firm’s business.

Given what we’ve seen so far with the company, the phrase “let’s not count our eggs before they hatch” would be apt here.

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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 writer Stanley Lim does not own any companies mentioned above.