Future of NOL sinks deeper into doubt

ON the surface, the agreed sale of APL Logistics by the NOL Group appears to be mystifying. Why would the group sell off its profit-making unit to sustain and finance its loss-making one?

On Aug 21, 2014, BT examined the impact of the sale of APL Logistics on the group. That Hock Lock Siew article, which came after NOL had confirmed last August that it was considering selling off its logistics unit or listing it as a separate entity, opined that while a spin-off listing could prove to be a masterstroke, the option of selling the logistics business appears puzzling and may in fact pave the way for the company to eventually get rid of its other assets.

With NOL choosing the latter option, it appears that the fate of its shipping business, APL, may be thrust further into doubt.

The shipping line has reported its third consecutive year of pre-tax losses. This means it has triggered one of two watch-list red flags established by SGX to signal to investors that such companies should be dealt with caution: pre-tax losses - excluding one-time items - for three years in a row.

Sure, NOL may still be some way off the other SGX watch-list condition - which is when a company's average daily market capitalisation over 120 market days falls below S$40 million. On Friday, when it reported the 2014 financial year results and issued a caution on SGX of its third consecutive loss-making year, NOL's market value of S$2.63 billion was comfortably above the SGX threshold of S$40 million.

But the question that now begs is if the sale of APL Logistics may lead to a dilution of the group's market cap - either by shaving some value off its share price or if investors decide to flee from a stock that now hinges on a loss-making business unit. If either of these come true, NOL may inch closer to being put on the SGX watch-list.

The group's focus on cost efficiency in its shipping business to make gains at the operating level has helped it improve its core Ebit steadily in the last year. But that has not been enough to pull it out of the red, primarily because of its scale and market share.

NOL's liner shipping business, APL, is reportedly the world's seventh largest in terms of slot capacity, but even then that only gives it a 3.4 per cent share of the global market. By contrast, Maersk, the world's largest in slot capacity, has more than four times the market share at 14.9 per cent. For APL to bridge that gap and achieve a higher magnitude of economies of scale by cost efficiency, it would cost the group more than US$5 billion just to double its current fleet.

NOL revealed at its briefing for media and analysts on Tuesday that the sale of APL Logistics is aimed at improving its balance sheet and also allows it to focus more on its shipping business. For the short-term, that seems to be a viable option. Perhaps the proceeds from the sale of the logistics unit can be pumped back into the shipping business by buying more and larger vessels to improve its capacity and scale.

In that sense, the sale was a desperate attempt to provide a lifeline to the shipping line.

However, whether it can sustain that in the long run remains to be seen. Much of it depends on external factors - the global economic situation, the container industry and the cost and impact of bunker fuel.

The first two seem to be working in NOL's favour, with analysts stating that 2015 may prove to be a year where NOL returns to the black. A lot of this is because NOL, which is exposed to US trade routes, tends to benefit substantially from the looming recovery in US trade volumes.

The long-term impact of low bunker prices may be less certain - a thought that the NOL CEO has also raised and acknowledged on several occasions in the last week. In an environment of overcapacity in the sector, NOL is constrained from leveraging on lower fuel costs to increase its vessel speed. It may find it hard to abandon slow steaming since it has to manage capacity.

Should its shipping business not recover, what could NOL do then? It has already sold two of its major assets - APL Logistics and the NOL HQ building. It may then choose to sell off its shipping assets or choose to privatise.

READ MORE: NOL to sell APL Logistics to Japan's KWE for US$1.2b