NOL - May 2009 Operational Update – Downside Risks are Limited

May-09 data — NOL’s May-09 revenue/TEU and shipping volumes were flat MoM and -23%/-21% YoY, the latter due to base effects. Mid-year seasonality will likely lift volumes slightly in coming months while rates may be forcibly raised from current “unsustainably low” levels. While the longevity of these positive data points is debatable, we re-iterate our view that freight rates and shipping volumes face limited downside risks from current levels.

Industry financing woes have eased — Recent improvement in equity and credit markets provides an opportunity for shipping companies to plug their funding gaps at a lower cost. Concurrently, better access to liquidity will also allow financially stronger players to acquire assets from their more distressed counterparts. The revival of the sale and purchase market may set visible price benchmarks that may, in turn, trigger loan-to-value covenants embedded in shipping loans, forcing further distressed sales.

Well-positioned for consolidation phase — NOL’s FY09E net gearing of 0.1x is one of the lowest in its operating history (Figure 4) and also one of the lowest amongst peers (Figure 5). NOL’s ability to make acquisitions from a position of strength is a distinct advantage as the industry enters a consolidation phase.

Maintain Buy/High Risk — Our S$2.00 (ex-rights) target price is based on 1.3x FY09E P/B, similar to levels seen in 2002 recovery. Catalysts: 1) ability to raise rates above current “unsustainably low” levels; 2) volume recovery as global trade resumes; 3) accretive acquisitions. Risks: 1) a prolonged economic recovery; 2) over-paying for acquisitions; 3) persistent vessel over-supply.

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