Container shipping outfit Neptune Orient Lines Ltd (SGX: N03) was up by as much as 10% earlier today when it opened at S$0.96 a share.
Short-term price movements in individual stocks often have no traceable reasons. But, it’s likely that Neptune Orient Lines’ reaction this morning had been due to media reports – most notably from that of the Wall Street Journal – that surfaced over the weekend; the reports said that the firm had been placed on sale by its largest shareholder, Temasek Holdings.
According to Neptune Orient Lines’ latest 2014 annual report, Temasek, which is one of the Singapore government’s investment arms, owns 67% of the shipping firm as of 2 March 2015. Regulations in Singapore require any person or organisation that buys over more than 30% of a listed company to make an offer for all its shares.
So, if Temasek were to sell its entire in Neptune Orient Lines at one go, the acquirer would have to make an offer to privatise the company. This is likely what has led to shares of Neptune Orient Lines jumping; generally speaking, takeovers usually occur at a price that’s higher than what a firm might be trading at currently.
But, investors should note that Neptune Orient Lines had released a press statement on Sunday night explaining that it “has not made any decision with respect to, and has not entered into any agreement for, a potential sale” of itself and there is thus “no assurance” that any sale will be made.
It’s also worth pointing out that speculating on a takeover can be a dangerous game to play if no consideration’s being given to the underlying economic worth of the business of any particular company that’s rumored to be privatized.
On that note, it can be a worthwhile exercise to take a look at Neptune Orient Lines’ value.
The shipping firm is in an alliance – the G6 – with five other industry peers. Of the quintet, four are actually publicly-listed and they are namely Mitsui OSK Lines, Nippon Yusen Kabushiki Kaisha, Hyundai Merchant Marine, and Orient Overseas International. You can see in the table below how their price-to-book (PB) ratios look like:
|Share||PB ratio (as of 19 July 2015)|
Source: S&P Capital IQ
At Neptune Orient Lines’ opening price of S$0.96 today, it’s trading at 1.06 times its trailing book value, which is significantly higher than the PB ratio of three of its four listed peers within the G6 alliance. This exercise is not an apples-to-apples comparison for sure, but it’s still useful for a directional read on where Neptune Orient Lines’ valuation is at the moment.
Over its past six fiscal years, Neptune Orient Lines had made losses in five of those years; the numbers would have been worse if not for the company’s profitable logistics arm helping to pull up some of the slack (see chart below).
Source: S&P Capital IQ
Neptune Orient Lines had recently sold its logistics arm and it would have to depend solely on its loss-making liner business from now on. Unfortunately, the company’s latest earnings release, for the quarter ended 3 April 2015, continued to paint a picture of a rough future for shipping activities. The company said:
“Going forward, global economic prospects remain uncertain. Freight rates remain pressured from persistent overcapacity in the container shipping industry.”
With all these in mind, market participants hoping to make a quick buck on Neptune Orient Lines by speculating on a possible privatisation would have to contemplate the odds that an informed buyer would be willing to pay a significant premium above the container shipping outfit’s book value (bear in mind that Neptune Orient Lines is already at a slight premium to book value at a share price of S$0.96) when the firm’s having a multitude of operational issues to juggle with as alluded to by its consistent losses over the years.
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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 Chong Ser Jing doesn't own shares in any companies mentioned.