[301214.EN.LOG] Singapore's Neptune Orient Lines Faces Dilemma Over Sale of APL Logistics

SINGAPORE's Neptune Orient Lines (NOL), owner of container shipping line APL and APL Logistics, has found itself in a quandary as it looks to sell its supply chain operation, which could be valued at US$1 billion - more than half of the parent company's market value.

If APL Logistics is sold at a high price, the resulting market value of the remainder of its parents assets, which would still comprise its liner unit APL, may come under more pressure, reports London's Loadstar.

But if it doesn't sell its logistics unit, the group may struggle to deploy fresh capital in the container shipping division - which, in turn, would yield a loss of competitiveness at APL Logistics.

NOL has been in the red for a few years now, with cutting costs at APL its chief priority. A sale of APL Logistics, which has been consistently profitable, could help NOL repair its balance sheet.

The group's capital structure is stretched, but value, the argument goes, could be released if proceeds from disposals were used to pay down its huge debt load.

APL Logistics is a relatively attractive asset. It has grown revenues and Ebitda by four per cent over the last three quarters compared to the same period in 2013. As at October 31, it reported revenues and core Ebitda of $1.2 billion and $56 million respectively, for an implied Ebitda margin of 4.6 per cent.

Financial newswires have reported that APL Logistics could be worth up to $1 billion, which means its implied equity value could amount to 50 per cent or more of NOL's $1.6 billion current market value, depending on certain assumptions.

That's not unrealistic, although the unit's revenues and Ebitda amount to only 18.7 per cent and 25 per cent of the group's total revenues and Ebitda, respectively.

While APL Logistics has shown growth, albeit at a slow pace, NOL's core business needs big operational cost savings and massive investment cuts to stay afloat. What will be left of NOL's core business once the sale of APL Logistics is occurs remains a big question for management to answer.

The more the equity of APL Logistics is valued - say up to $800 million - the less NOL's equity may be worth on the stock exchange post-disposal, although NOL shares may bounce on the day the sale is announced.

It would appear that investors have yet to be convinced a sale of the logistics division is in the best interest of shareholders. On the face of it, it is taking quite a long time for the divestment to be sealed, and current market conditions do not bode well for a float.

Whether NOL can afford to divest the asset depends on whether the divestment itself would open the door to a wholesale takeover of NOL's core liner unit. The big caveat is whether such a scenario has become less likely since Germany's Hapag-Lloyd, the most obvious suitor, tied the knot with Chile's CSAV.

Source : HKSG.