NOL annual results show the task ahead for CMA CGM

The fourth-quarter results of Singapore’s Neptune Orient Lines indicate that France’s CMA CGM, which placed an offer to acquire NOL and its container shipping line APL, will have to pull out all the stops to make economic sense of its acquisition once the deal is completed.

However, it also shows that improvement in cash flow generation at APL is possible, spurred by significant cost savings. This a big attraction in the CMA/APL tie-up, which values NOL equity at $2.4bn – a very high price based on the take-out multiples.

“On a full year basis, NOL posted a net profit of $707m,” NOL said when it released its trading update on 23rd February.

Excluding a one-time $888m gain on the sale of its logistics unit to Japan’s Kintetsu World Express, NOL incurred a full-year net loss “of $181m, an improvement of 30% over last year”.

Its full-year core EBIT loss at group level (NOL) diminished only 5% to $72m, while APL’s core EBIT loss narrowed from $139m in 2014 to $98m in 2015. However, the picture is more mixed when fourth-quarter EBITDA, which almost halved on a comparable basis, is considered.

“This is APL’s fourth consecutive year of reduced losses,” NOL argued.

The good news here is that there might be more room to cut operating costs and make APL profitable at operating level, while additional net income could stem from the elimination of heavy interest repayments.

After all, CMA CGM is paying a full price of over 1x sales and 17x EBITDA to acquire NOL given that the latter’s EBITDA was $285m in 2015 and NOL’s net debt is more than $2bn. NOL said that it posted a core EBIT loss of $65m in the fourth quarter, but its core “EBITDA remained positive at $39m,” all of which came from APL.

The takeover timetable also appears to be on track although necessary antitrust approval remains to be issued by the European Commission, China and the US.

“All required anti-trust filings have been made and CMA and NOL are working to obtain the necessary anti-trust clearances. As previously announced, NOL expects the anti-trust clearances to be obtained by mid-2016.”

NOL turned from predator to prey as its accumulating debts threatened to sink it and it had to sell assets to survive. Its balance sheet, where high borrowings are still noticeable despite the divestment of its logistics arm, shows the extent of the challenge for its buyer, notwithstanding the “rigorous cost management as well as a yield-focused trade strategy” that emphasised network rationalisation and better cargo selection, according to NOL.

APL achieved cost savings of $100m in the fourth quarter, bringing its full-year cost savings to $435m. As a result of these and lower bunker costs, APL’s total cost of sales per 40ft container (FEU) fell by 17% year-on-year.

Source: Transport Intelligence, 4th March 2016

Author: Alessandro Pasetti