Neptune Orient Lines NOL - Bouncing along the bottom

NOL has released monthly operating data for the period from 2nd May to 29th May. Container shipping volumes were down -21% yoy (up 1% MoM) compared to a similar level of decline (-22% yoy) in April. Year-to-date volumes are down -25% versus our full year 2009 volume expectation of -9%. Average freight rate was down -23% yoy (flat MoM) and year-to-date average freight rate is down -18% versus our full year 2009 forecast of -16%.

Our latest UBS Container Freight Rate index (CFRI) indicates that Transpacific and Asia-Europe rates declines have sequentially worsened in the first three weeks of June compared to May. In the context of rising bunker prices and liners’ relative inability in mitigating rising fuel costs from surcharges, we believe current rates on both of the major trade lanes are well below cash costs for most (if not all) carriers.

Maritime consultant Drewry has recently downgraded global container volumes forecasts for 2009 to -10.3% (from -5.3%) while UBS is forecasting a -6% decline in volumes for 2009 and an effective supply growth (after delays, cancellations and scrapping) of 15%. We remain our view that supply/demand for the container industry will not return to balance until 2011.

Our PT is based on VCAM, UBS’s proprietary cash-flow based valuation tool (8% WACC). We are still in the process of revisiting our forecasts post rights issue.

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