1H16 loss not surprising: OOIL’s recurring loss in 1H16 was USD72m, driven by recordlow freight rates (-21% y-o-y). OOIL had earlier released its operational results (volumeand revenue) for 1H16 on 22 July. While 1H16 EBITDA was largely in line with ourforecast, the miss on EBIT was driven by higher than expected depreciation costs (+27%y-o-y). We attribute the higher depreciation expenses to a possible change in estimates ofresidual value of assets, similar to our discussion in our report, Analysing the impact ofpotential accounting changes (10 June 2016). Operating margin was -3% during theperiod vs our forecast of -1.5%. Even so, OOIL has continued to perform relatively betteron most metrics compared to Japanese lines that have released results thus far.
Uncertain 2H16 but recent industry trends positive in the long run: During theanalyst briefing, management noted that freight rates rebounded at the start of 2H16 butremained cautious on the sustainability of the recent rate increases in key routes andattributed them to mainly capacity withdrawal by shipping lines. Indeed, in 3Q16 to date,the CCFI composite is on an average up 5% vs 2Q16. While in the near term, demandsupplymismatch is expected to dominate the direction of fright rates, acceleratedscrapping, further concentrated alliances and nearly frozen order book bode well for thelong term. OOIL, in our view, with its strong balance sheet is well positioned to ridethrough this downturn.
We now forecast losses in 2016 (from profit previously) to reflect the sharp decline inOOIL’s freight rates. In 2H16, we forecast only marginal profits driven by sequentialimprovement in freight rates, offset to some extent by higher depreciation forecasts. Ourloss estimate of USD63m for 2016 compares with consensus estimates for a profit ofUSD163m. We expect sharp earnings downgrades by consensus following the weakinterim results.
Cut TP to HKD33 (from HKD40) on lower earnings forecasts. In the y-t-d, OOIL’s shareprice declined by 26% vs a 6% increase in the HSI index. Even so, the stock remainsattractively valued, trading at 0.44x 12-month forward PB close to its five year low. Wetrim our PB multiple in our valuation to reflect the weak near-term earnings outlook andnow value OOIL based on a 2016e PB of 0.56x close to the trough valuation during 2011-15 (vs 0.66x based on the average of the trough and mean 12-month forward PB during2011-15). Our TP implies upside of 20.4% and we reiterate our Buy rating. We believeOOIL’s current valuation does not adequately reflect its strong competitive positioningbacked by a strong balance sheet, participation in Ocean alliance and its order book.