Precursors for shipping industry recovery lacking – 1) industry consolidation yet to occur as players focus on survival rather than growth/M&As; 2) shipyard orderbook is still high and dependent on additional funding, while demolitions and order cancellations have been slow. A large-scale coordinated response between shipyards, ship owners, and financiers is necessary to tackle the current shipping crisis. Recent hikes in Asia-EU rates since Feb-09, led by Maersk and followed tacitly by other players, was encouraging as pricing power returned to the industry. But sadly, the effort didn’t gather further momentum.
Refinancing risks – We expect NOL to report peak losses in 1Q09 and cut our estimates further, post management’s recent guidance for 1Q09 loss of US$240mn. We expect lower losses in 2H09 when cost-saving measures take effect. NOL has US$467mn short-term debt due in FY09; with negative operating cash flows this year, debt refinancing may be an option. NOL has ruled out rights issue, but we think it should not be entirely dismissed. Investors could remain wary in light of recent cash calls from other Temasek-linked companies.
Maintain Sell – In light of above concerns, we maintain Sell and keep target price at S$0.90, in line with support PB of 0.5x found in past down cycles, but above trough valuations of 0.4x as we are likely past the quarter of peak losses.
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