NYK, MOL and K Line set for better times

Japanese trio set to benefit from improving dry and containership sentiment, says Nomura.

NYK, Mitsui OSK Lines (MOL) and K Line will see improved earnings this year due to better market sentiments, predicts Japanese bank Nomura.

“We have raised our earnings forecasts having changed our assumptions for containership and dry bulker rates,” analyst Masaharu Hirokane said in a note to investors.

“We have factored in improved containership rates as a result of the upturn in demand on Asia-Europe routes, and improved dry bulker rates as a result of the greater-than-expected increase in Chinese iron ore imports in the first half of 2017.”

Barring any sharp decline in demand in either area, Hirokane believes that rates will be able to remain at their current level, with no major changes in 2018.

In addition, Namura believes the three shipowners are set to reap cost savings of JPY 60bn ($550m) in FY2019 following the merger of their respective containership operations.

Hirokane said this would boost FY2019 recurring profits by JPY 22bn at NYK and JPY 19bn apiece at MOL and K Line, proportional to their stakes in the new company.

“We think that average containership rates on all routes will rise 3.9% year-on-year in 2017. We forecast a 3.5% rise in rates on Asia-Europe routes, which will boost overall figures. We also expect rates to peg level year-on-year in 2018 as supply and demand both rise around 3%,” the analyst said.

In the dry sector, Nomura said it assumes that the composite Baltic Dry Index (BDI) will come in at 990 on average for 2017 against its previous assumption of 730.

“We have raised our 2017 growth forecast for iron ore ocean freight volume from 2% to 5.5%. We expect rates for capesize bulk carriers to increase 45% year-on-year to $10,900 per day in 2017 from earlier assumptions of $8,100 per day,” Hirokane said.

For the first quarter of FY2018 Nomura has raised its recurring profit forecasts from JPY 14.3bn to JPY 27.9bn for NYK, from JPY 28.9bn to JPY 29.2bn for MOL, and from JPY 11.3bn to JPY 19.5bn for K Line.

However, Hirokane concluded that while Japanese shipping stocks do constitute potential investment candidates based on prospective early FY2019 profit levels.

"It is premature to factor in earnings recoveries now, given market volatility risks and the lack of disclosure about prospective cost savings in containership operations in FY2019," the analyst added.

Earlier this month Japan’s big three shipowners reported profits for the first quarter, bouncing back from losses a year earlier and raising hopes the firms could be emerging from the industry’s worst-ever downturn on record.

MOL swung to a JPY 1.1bn operating profit from a loss of JPY 3.6bn a year earlier, NYK booked operating income of JPY 3.6bn compared with a loss of JPY 11bn yen a year earlier, while K Line posted an operating profit of JPY 3.9bn versus a loss of JPY 14.8bn a year earlier.