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July 21, 2020

NEPTUNE ORIENT LINES: Cost Control Confidence

BY Warut Promboon

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( 12 mins)

Executive Summary

Summary
GeographySingapore
SectorMarine
Credit ratingNR/NR (Moody’s/S&P)
Report date23-June-20

Since our last report, the NOLSP complex (in SGD) has outperformed as COVID-19 situation improved in many countries as well as the announcement of CMA CGM’s 1Q’20 results on 5-June. CMA CGM is Neptune Orient Lines (NOL)’s parent company. The outperformance of NOLSP 4.65% 9/20s was within our prediction. At 4.7% yield-to-maturity (YTM) (Ask) at the time of this report, we believe any further upside will be limited as we see the bonds unattractive relative to peers. We also think the bonds’ 3 months to maturity will make it very difficult to take profit with reliable quotes. As such, we revised our recommendation on NOLSP 9/20s to NEUTRAL from OVERWEIGHT. 

CMA CGM’s 1Q’20 shipping EBITDA (which increased 31.7% yoy) surprised us on how well management could control its cost and that leads us to adjust our EBITDA forecast for FY2020. We are confident after seeing the 1Q’20 results that NOL will have sufficient liquidity to redeem its NOLSP 4.4% 6/21s at the maturity date next June. Despite the bond’s recent rally, we still believe the bonds offer an attractive carry at 16.6% YTM for a credit we consider as “B+”. As such, we took the first opportunity to revise our recommendation to OVERWEIGHT from UNDERWEIGHT. 

Valuation

Both NOLSP 9/20s and NOLSP 6/21s have outperformed since our last report (EXHIBIT 1) on CMA CGM’s relatively resilient 1Q’20 results, stemming on rising container freight rates (EXHIBIT 2). The 1Q’20 results surprised us, suggesting COVID-19 may have less negative impact on the container shipping industry than what the market anticipated. NOLSP 9/20 performance were within our expectations while we were proven wrong on NOLSP 6/21s.

Compared to “B+”-rated corporate bonds (in SGD) in the APAC region’s transportation sector, the YTM of NOLSP 9/20s is currently staying at an unattractively low level (4.7% on 17-June), while that of NOLSP 6/21s is still significantly higher than peers’ (at 16.58% on 17-June (EXHIBIT 3). 

NEPTUNE ORIENT LINES: Cost Control Confidence 7
EXHIBIT 1: NOL’s SGD bond Ask YTMs (NOLSP 9/20 on top, NOLSP 6/21 below)
NEPTUNE ORIENT LINES: Cost Control Confidence 8
EXHIBIT 2: World Container Index – USD per 40 ft container
NEPTUNE ORIENT LINES: Cost Control Confidence 9
EXHIBIT 3: NOLSPs’ YTMs vs. APAC’s “B+”-rated transportation corporate bonds’

A strong performance on NOLSP 9/20s with about 3 months to maturity leads us to believe further upside is limited. As such, we advise bondholders to hold the bonds until maturity and revise our recommendation on NOLSP 9/20s to NEUTRAL from OVERWEIGHT. Our liquidity assessment presented in the next section continues to support our projection that NOL will be able to redeem NOLSP 9/20s. CGA CMA’s 1Q results have made it more comfortable to predict a higher EBITDA this year, and we now expect NOL to be able to redeem its NOLSP 6/21s. NOLSP 6/21 YTM rallied about 400 bps in a month but we believe the bonds still offer attractive carry at 16.6% at the time of this review. As such, we took our first opportunity to correct our recommendation on NOLSP 6/21s to OVERWEIGHT from UNDERWEIGHT. 

CMA CGM’s 1Q’20 Results

CMA CGM’s 1Q’20 shipping revenue dropped 3.3% to USD5.5bn on a 4.6% yoy decline in volumes (EXHIBIT 4).  We have projected that the actual higher freight rates would compensate for the decline in carried volumes. Indeed, CMA CGM’s revenue contracted more modestly in 1Q’20 than anticipated on fuel surcharges which partially mitigated factory shutdowns in Asia in February and March. The Group’s shipping EBITDA increased by 31.7% yoy on the cost reduction plan implemented throughout 2019, and is still continuing during the period. The cost reduction surprised us and prompted us to adjust our EBITDA forecast for FY2020 (See CMA CGM’s EBITDA Projections) 

NEPTUNE ORIENT LINES: Cost Control Confidence 10
EXHIBIT 4: CMA CGM’Q’20 selected shipping financial results

CMA CGM’s logistics segment (CEVA) consists of a small portion of CMA CGM’s results (14% of the group’s EBITDA in 1Q’20), and its performance slightly changed in the quarter compared to 1Q’19 (+0.6% yoy in revenue and -4.9% in EBITDA). Therefore, we shall ignore this segment in our 2020-2021 projections below.

Financial Projection Update

CMA CGM’s EBTIDA projections

Management forecasted a 10% yoy decline in volume during 1H’20 on the negative impact from COVID-19 although the actual yoy volume decline in 1Q’20 was only 4.6%. As such, we conservatively adopt CMA CGM’s projection for a 10% decline in volumes in the whole 2020. We maintain our assumption that freight rates in 2020 will be on par with that in 2019 although the freight rate started to rebound last month and the actual average year-to-date freight rate in 2020 was already higher than that of 2019. As a result, we predict FY20 revenue to drop 10% yoy. 

The cost reduction success in 1Q’20 leads us to increase our EBITDA margin forecast to 12.7% from 5.7% previously in our May report (EXHIBIT 5). The revised EBITDA forecast reflects lower operating expenses, excluding depreciation and amortization, relative to total revenue. We believe management will be able to continue its cost reduction plan in 2020, and to assume that operating expenses, excluding depreciation and amortization, as a percentage of revenue in 2Q’20 and 2H’20, will be at 87.6% which is the same as in FY’19. 

NEPTUNE ORIENT LINES: Cost Control Confidence 11
EXHIBIT 5: EBITDA estimates for CMA CGM in 2020 (excluding IFRS 16; USDmn)

CMA CGM’s revised EBTIDA forecast will further improve the group’s debt repayment capacity not only in 2020 but also in 2021, when NOLSP 6/21s mature. Such a higher EBITDA is mainly the result of CMA CGM’s cost reduction effort in 1Q’20, which was untested by the time of the previous report. The 1Q’20 results provide us with more confidence to forecast.

CMA CGM’s liquidity situation in 2020-2021

The company reported total capex of USD1.5bn and interest expenses on net borrowing and lease liabilities of USD1.3bn in 2019. CMA CGM’s management has not guided for these figures in 2020 but we conservatively estimate that both figures will stay unchanged this year even though capex this year could be much lower yoy post the completion of the 2019 CEVA acquisition, the recent asset divestments, and the need to reduce capex to boost the company’s liquidity.

The expected lower capex will, in our opinion, broadly compensate for an increase, if any, in repayment of interest on higher net borrowings and lease liabilities this year. On the other hand, on top of a cash balance of USD1.8bn, according to CMA CGM, other major funding sources this year are to come from the following: 

  1. The EUR1.05bn syndicated loan (USD1.1bn, announced on 13-May) from a consortium of BNP Paribas, HSBC, and Société Générale. This loan is part of France’s State-guaranteed loan scheme established at the end of March in response to the COVID-19 pandemic. The State guarantees 70% of the loan, which has an initial one-year maturity and an extension option for up to five additional years. We view this loan as credit-positive on CMA CGA’s bank relationship and ability to secure the partial state guarantee from France;
  2. Approximately USD820mn of vessel sales & lease-back and vessels refinancing deals finalized at end-2019; 
  3. USD968mn sale of ten port terminals to Terminal Link (the deal was signed in December 2019 with China Merchants Port). Note that in its 1Q’20 result announcement, CMA CGM revealed that the group had disposed a first portfolio of eight port terminals for a cash amount of USD815mn. According to the group, the sale of two additional terminals covered by the agreement between CMA CGM and China Merchants Port (CMP) should be closed by this summer; and
  4. A three-year extension to the credit lines due in 2020 for a total of USD535mn (signed in March 2020).

Putting all together, we arrive at the estimated liquidity position in EXHIBIT 6.

NEPTUNE ORIENT LINES: Cost Control Confidence 12
EXHIBIT 6: CMA CGM’s estimated liquidity position as end-2020 (USDmn)

As such, we believe CMA CGM’s liquidity position is comfortable this year with available funding sources being far more than able to cover its financing needs this year, including the NOLSP 9/20s redemption in September. CMA CGM will have to repay a total amount of USD3.02bn worth of debt maturing in 2021. This does not include the EUR1.05bn syndicated loan (with initial one-year maturity), and the USD535mn credit lines, both of which were signed this year but can be extended. It is clear that the USD3.6bn liquidity balance projected for this year would be more than sufficient to repay the 2021 debt. We believe CMA CGM can generate enough EBITDA to meet its capex and interest expenses in 2021. If necessary, CGA CMA can still dispose a minority stake in CEVA. 

*We would like to thank Phan Minh Ngoc, PhD for his contribution in this report*

Disclaimer

Analyst Certification: 

The analyst named in this report certifies that all views expressed in this report accurately reflect the personal views of the analyst with regard to any and all of the subject securities and companies mentioned in this report and no part of the compensation of the analyst was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by that analyst herein. 

Disclosure: 

The analyst named in this report does not have any financial interest in the corporations(s) mentioned in this report. Additional information will be made available upon request.

Disclaimer: 

Research originating in Hong Kong is issued by MLB Asset Management Limited (“MLB”). MLB, a limited company registered in Hong Kong, is regulated by the Hong Kong Securities and Futures Commission (SFC). The registered office is at Unit 9, 12/F Wing On Plaza, 62 Mody Road, Tsim Sha Tsui East, Kowloon, Hong Kong. All of the opinions contained in this report constitute the views of the analyst named in this report as of the date this report is issued. The opinions are hence subject to change without notice and are not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report. In relation to producing research, MLB relies on factual information provided by related entities, regulators, and/or other market information providers. 

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