What surprised us
On Aug 11, Orient Overseas Int’l (OOIL) reported 1H14 net profit of US$181mn, significantly above our forecast of US$70mn and exceeding our prior FY14 full year/Bloomberg consensus forecasts of US$180mn/142mn. The key surprises came from (1) its liner arm OOCL’s EBIT margin beat of 4.5% (vs. GSe: 2.0%) achieved from stronger volumes (+10% yoy, vs. GSe: 6%), record load factors in 2Q and most importantly a 6% yoy unit cost reduction (vs. GSe: -3%, ex-fuel unit costs were down 4% yoy), helped by its superior yield management, cost efficiencies and lower fuel costs; and (2) strong growth at its logistics segment (revenues of up 39% yoy, 10% of overall group), as OOCL continues to grow the business.
Takeaways from results briefing: (1) Positive trends: OOCL has seen satisfactory trends for 3Q so far and strong volume bookings till at least Oct 2014; (2) Costs: Fuel efficiencies have been realized from the arrival of its new efficient vessels, retro-fits of older vessels and continued network optimization. Expects benefits to be realized in 2015 with the expanded G6; (3) Ordering plans: Discussions with G6 partners are only one factor whenOOIL decides on vessel ordering. Management reiterated it is considering further growth and has the balance sheet to do so.
What to do with the stock
We lift our 2014/15/16E EPS 82%/19%/9% given OOCL’s impressive unit cost management and margin outperformance in 1H14 (we expect 5% unit cost reductions for FY14, previously 4%). We also expect further cost benefits from the expanded G6 from 2015. We lift our Director’s Cut-based 12-m TP 12% to HK$66 (from HK$59), implying 1.1X 2014E P/B, which we think is justified given ROE growth from 2014E’s 7% to 10% in 2016E.
Maintain CL-Buy with 54% upside. Risks: Overcapacity, volatile fuel prices.