Neptune Orient Lines (NOL) - Rights issue

Rights issue. NOL announced that it is proposing a renounceable underwritten rights issue at the issue price of S$1.30 for each rights share on the basis of three rights share for every four existing ordinary shares. The net proceeds are approximately S$1.401b after deducting fees and expenses. Approximately 50% of the net proceeds will be used for the repayment of debts. The balance will be used for investments, general corporate and working capital purposes and/or further repayment of debts.

From the list, we note that the median P/E and P/B for the industry are 9.02 and 1.07 respectively. NOL is currently valued at 17.67 times P/E and 0.60 time P/B.

Upgrade from SELL to BUY with fair value raised from S$1.14 to S$2.12. The rights issue reduces the need to acquire bank loans to meet its operating and capital expenditures. It also reduces its net debt to equity ratio from 0.8 to 0.0 for FY2009F. However, it leads to lower earnings per share for all shareholders and dilution of interests for shareholders who do not take up the rights issue.

We like the rights issue as it allows NOL to tap the existing shareholders for cash to reduce its debts and improve its cash position. We upgrade our recommendation from sell to buy and raise the fair value from S$1.14 to S$2.12, which works out to 1.2 time book value for FY2009F.

Subscribe for the rights shares. We recommend that shareholders subscribe for the rights shares. This is because the rights shares are priced at a discount of 38.7% to the fair value of S$2.12 for the stock. Moreover, with cash from the rights issue, NOL will be able to continue with its operation needs and pay for new vessels. It will be in a stronger financial position as it weathers the downturn in the shipping industry.

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