NOL - Empty boxes make the most noise

We initiate coverage on Neptune Orient Lines (NOL), a Singapore-based shipping company with 74% of 2009E revenues from container shipping and 26% of 2009E revenues from logistics and terminals. Although management has been responsive in reducing capacity, we believe NOL’s container volumes will continue to fall as transpacific (26% of 2009E volumes) and Asia-Europe (15% of 2009E volumes) trading routes continue to decline. We are concerned about the repercussions of slowing Asian economies, which are likely to create weakness in the Intra-Asia/Middle-East (42% of 2009E volumes) routes.

NOL’s January 2009 monthly operating statistics indicate that its average revenue per forty-foot equivalent unit (FEU) was USD2,646, down 9.4% m-m and 11.5% y-y. Transpacific spot freight rates have fallen sharply in recent weeks, so we believe NOL’s freight rates face downward pressure as NOL’s transpacific trading route is due for annual contract negotiations in May. Freight rates for the Asia-Europe trade routes may have bottomed out but we do not expect a significant recovery until 2011, due to the oversupply of vessel tonnage. Similarly, we do not believe Intra-Asia freight rates will rebound sharply in the near term due to excess vessel tonnage from the Asia-Europe trade routes.

NOL has entered into charter agreements for 18 vessels with approximately 100,000 TEUs capacity (21.2% of existing fleet capacity), most of which will be delivered in 2009. These charter agreements were concluded in 2006-07, at the pinnacle of vessel charter rates. We are concerned about the timing of the deliveries and the high rates.

We initiate coverage on NOL with a REDUCE rating and a TP of SGD0.75 (implying 0.4x 2010 P/BV) with the SoTP methodology. We believe the stock price will underperform due to greater than expected losses in 2009 and 2010.

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