Nippon Yusen Stock: ONE Takes Charter Rate Hit, Supply Conditions Uncertain (NYUKF)

gorsh13/iStock Editorial via Getty Images Nippon Yusen Kabushiki Kaisha (OTCPK:NYUKF), or just NY for short, is a shipping and logistics company. It is quite vertically integrated, as it is has a share as a triarch in the joint venture Ocean Network Express or ONE, which is the 7th largest vessel fleet in the world for containerships, as well as substantial ownership of its own vessels in other markets like RoRo and bulk. Earnings come in from ONE through earnings from an equity-method affiliate line in the income statement, where relevant operation of those assets appears above-the-line at NY as if they were not vertically integrated. Otherwise, NY earns as an owner-operator for conducting its various businesses outside of containership which mostly is covered by ONE. In all, it trades in line with peers who are also substantially owner operators at a similar scale. While TTM PEs are low, it faces growing supply pressure, macroeconomic pressures on Japan and a reliance of its relevant segments on China. The Red Sea tensions are helping but other factors are pointing enduringly in an uncertain direction. Latest Earnings The new earnings are coming in about 4 days as of writing this, but we should have a look at the FY results which were the previous release to get an idea of what direction things were going in before looking forward. Segment Results (FY AR) Let’s start with the really ugly one of air cargo and transportation. The story here is that handling volumes weren’t that great, although they recovered towards the end of the calendar year. But the issue was on supply here, with pricing being massively hit by the full resumption of passenger travel, which adds to the freight supply. Also, some maintenance has been deferred into the current year which is affecting the outlook. There will be less full operation days this year, and supply will continue to improve relative to last year’s comps. In logistics, things improved towards the end of the year in Asia, but the overall volumes were down YoY. End markets like ecommerce stayed quite strong, as well as automotive and healthcare within Europe. The resilience of the US consumer was also a factor for decent volumes in contract logistics, but the main issue was the substantial declines in freight rates after the fraught logistical environment of 2022, which means declines in logistics that were quite substantial. This is an important segment, and profits also took a hit on that lower pricing. The outlook isn’t bad in terms of volumes, although the slower consumer demand environment that can be expected in Europe and the US should mean continued pressure on freight rates. Container shipping within liner trade suffered as new capacity entered the market and less fervent demand. Of course, the Red Sea disruptions as well as issues in the Panama Canal have created complications that result in a tighter demand and supply environment. For the tighter supply, the benefits will appear in the J.V (which contains owned vessels) in the form of fewer declines than what would have otherwise occurred in charter rates (still declined from 811 billion JPY to 100 billion JPY in affiliate profit), but as far as the container shipping operation goes, demand tension was enough to keep prices in front of costs. Nonetheless, major operating leverage means major operating profit declines on that smaller revenue. In terms of the outlook, we’d be a bit concerned about continued shipbuilding. The Red Sea matters are suspending issues, but the business is cyclical both on the ownership side and rather on the operations side, particularly where underlying demand could be at risk as the higher rate environment persists in the West. Terminals saw a decent performance in general, but a disposal affected revenues inorganically. Organically, things were growing in terminals. Bulk shipping is another significant segment. As of the FY results, automotive had been seeing continued recoveries supporting volumes despite congestion continuing and specific transit restrictions in the Panama Canal due to spring droughts. These continued to some extent but had been easing out into July. Things are turning though in automotive end markets, which is a concern for the outlook. Dry bulk wasn’t great, with China being weak macroeconomically, but China saw some initial stimulus and recovery into the latter part of the reported period. The energy business saw some pressure due to the incremental OPEC+ supply cuts which reduced volumes to some extent, but the US export season had been strong, and those cuts are going to be phased out in 2024. In general, things are trending above previous year’s levels. The other businesses is selling of bunker fuel and maintenance services for cruises, including aftermarket supplies. Maintenance grew in the mix which lifted margins and operating profit ahead of sales. Bottom Line China matters a lot for the bulk recovery. While disruptions may last, they are likely mostly priced in. What is also less likely to last is the macroeconomic backdrop. High rates are dragging on and inflation is mostly still above policy levels in key developed geographies. Supply will also continue to worsen. More ships come to market and scrapping is being held off for now as charter rates still remain above pre-COVID-19 and waterway disruption levels. Same goes for dry bulk vessels. While freight rates have fallen significantly YoY, they are still quite high and scrapping has fallen considerably. While NY is vertically integrated, which can be a nice thing, there is probably more upside right now on the upper part of the value chain because the disruptions more clearly benefit those chartering out ships. Operators have to contend with more expensive chartering, or in the case of vertically integrated NY, a relatively less exciting final market that is subject to immediate shifts in macro, including expectations for less car demand. They aren’t expensive. They are trading in line with a pick like Hapag-Lloyd (OTCPK:HPGLY) in terms of EV/EBITDA, adjusting for securities on the books. They seem to be in line in terms of PE as well at around 10x. It offers some decent absolute earnings yields on a TTM basis, but it’s standing in the way of possible economic deterioration, with the shipping cycle quite long in the tooth. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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