High fuel costs and lower freight rates halve NOL's gains

NEPTUNE Orient Lines (NOL) has suffered a 55 per cent plunge in full-year profit to US$363.7 million (S$556 million), as it clocked in a weaker-than-expected fourth quarter.

Higher fuel costs and lower freight rates continued to sink the carrier's bottom line, with fourth-quarter earnings diving 70 per cent to US$49.4 million, far lower than the US$72 million median forecast by a Bloomberg News poll of eight analysts.

But the shipping line is accelerating expansion plans for its fleet and port facilities amid improving market sentiment.

NOL's latest initiative, announced yesterday, will see it team up with Chinese shipping line SITC Group to develop a terminal in Qingdao, China's third- busiest container port.

'NOL delivered a solid performance in 2006 in the face of a difficult operating environment,' said chief executive Thomas Held, who was chairing his first results press conference at NOL.

'Our results show the combined impact of lower average freight rates and increased fuel costs over the past year.'

Dr Held, who joined NOL last November, said the Singapore firm had performed better than many of its rivals, which have also reported lower profits for last year.

The container shipping industry has been struggling with oversupply fears since last year, as record shipping earnings in previous years spurred a strong expansion of the global fleet.

This has sent freight rates falling as carriers jostle to keep their ships filled and maintain market share.

NOL is a case in point, with revenues flat at US$7.26 billion last year despite the carrier moving 8 per cent more boxes.

Competitive pricing pressures and changes in volume mix led to a 7 per cent fall in average revenues per container.

The bottom line was further hit by higher fuel prices, which raised total fuel costs for its liner business by US$237 million.

NOL said most industry analysts expect the container shipping market to remain in oversupply and fuel prices are also expected to stay high.

But Mr Ron Widdows, who heads NOL's liner business, noted that sentiment is improving, with freight rates rebounding on Asia-Europe routes.

He added that trade growth has also been outpacing the best of estimates in previous years, indicating a potential upside for shipping companies. But he stopped short of predicting a rate recovery in Trans-Pacific services, the biggest contributor to NOL's liner sales.

NOL will increase spending on ships and other capital equipment this year to US$729 million, from US$178 million.

It will add seven ships to its fleet this year, boosting capacity by 10 per cent. It is also expanding some of its ports in the region. The new Qingdao terminal will cost a few hundred million US dollars, said Mr Widdows.

Full-year earnings per share were 25 US cents, down from 55.35 US cents the previous year. Net asset value per share was US$1.45, down from US$1.79. A final dividend of four cents per share has been recommended.

NOL shares fell 14 cents to close at $3.10 yesterday, ahead of the results announcement. The decline came amid the worst marketwide fall in eight months.

bryanlee@sph.com.sg