NOL - Caught in stormy seas

Caution: Stormy seas. Neptune Orient Lines Ltd (NOL) is a global container shipping, terminals and logistics company. It ranks among the Top 10 players in the global container shipping industry. We liken NOL to a sturdy ship that has been caught in a disastrous storm - no doubt it is a sound company helmed by an experienced management team, but macro conditions are working against it and the challenges are expected to persist. The shipping industry is directly exposed to global economic forces. Ongoing recessionary woes have resulted in a severe slump in consumer demand and global trade, hurting carriers across the board, with many predicting losses for the year. The International Monetary Fund (IMF) has recently warned of a protracted global recession, quashing optimism over green shoots of recovery. In its statement, it said that "the downturn is likely to be unusually severe and recovery is expected to be sluggish".

Fragile industry outlook. The weak industry outlook is further exacerbated by excess capacity supply, driving down the already weak freight rates to economically unviable levels. Among NOL's main trade lanes, only the Intra-Asia route remains profitable. The Transpacific route is hovering precariously around its breakeven level, while the Asia-Europe route is chalking up losses. With more tonnage slated for delivery between 2009 and 2011, the industry will continue to struggle with supply overhang, delaying the recovery process.

Expect losses for the next two years. Having incurred a net loss of US$149m in 4Q08, the group expects losses to widen to US$240m in 1Q09 on worsening business operating conditions coupled with a seasonally quiet quarter. Losses are almost a definite for FY09 and even FY10 - we are projecting a US$422.5m loss in FY09 followed by a narrower US$170.2m loss in FY10, implying the absence of dividend payouts.

Management has put in place several cost-reduction initiatives that could result in cost savings of US$550m for the year. We expect these measures to take some pressure off the group's earnings in subsequent quarters. Lacking catalysts. A sustained recovery of the real economy and resumption of trade flows are prerequisites for NOL's revival. For now, the protracted slump will weigh on profitability. We see no near term catalysts for the stock and initiate coverage with a SELL rating and S$0.815 fair value estimate, based on 0.4x FY09F NTA. Risks to our assumptions include a speedier-than-expected global economic recovery and positive macro news flow which could lift sentiment.

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