NOL - Sell: February 2009 Operational Update – Slight Volume Uptick

NOL’s Feb-09 weekly volumes +10% MoM, -21% YoY, but MoM comparison is distorted by CNY effects in Jan-09; excluding these, we estimate weekly volumes were +1-2% MoM. Feb’s slight volume uptick echoes well with limited economic data releases suggesting tentative bottoming signs, e.g., S’pore’s first MoM increase in NODX. NOL’s rates continue to decline by 10% MoM, 16% YoY on lower core freight rates and lower bunker surcharges.

Too early to turn positive — Liner companies continue to face severe headwinds on two fronts: vessel financing and demand/supply imbalance. Fortis, one of the Top 5 banks offering syndicated shipping loans, noted that only 4 deals worth US$332mn were completed in 1Q09 vs. 268 deals worth US$70bn in 2008 (US$15.8bn in 1Q08), and syndication activity was “dead right now”. Ship owners need to raise US$350-500bn for committed orders at shipyards but face intense competition for limited funds, declining collateral values and higher spreads (300bps currently from 50-100bps 12 months ago).

Hope for supply rationalization — More aggressive delivery postponements and cancellations of existing order book remain the industry’s best hope for restoring demand/supply equilibrium. Only 0.2mn TEU of containerships were delivered in Jan+Feb-09 vs. expected 1.8mn TEU for 2009, implying delivery shortfall of 0.6mn TEU in 2009 (33% of current expected deliveries). We expect demand/supply to trend toward equilibrium at the earliest by end-2011.

No reason to own NOL – We maintain our Sell/High Risk rating given our cautious industry outlook. Our S$0.90 TP is based on trough PB of ~0.4x.

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