NOL may begin hunting

We believe NOL is targeting an acquisition within the container/logistics/terminal space of material size. Assuming a debt-to-equity ratio of 40%, its US$1bn rights issue can be combined with US$1.5bn of debt to produce a total purchasing power of US$2.5bn. This can be used to buy very significant assets, especially given the sharp fall in asset values. The lower the acquisition price, the larger the potential upside for NOL. We upgrade NOL to NEUTRAL from Underperform, and increase our cum-rights target price to S$1.62 (from S$1.30). Our valuation target has been raised from 0.7x P/BV to 0.9x 2009 P/BV because of a stronger balance sheet, and its readiness to conclude M&A deals for long-term growth. Key risks are valuations in any deals, any extended weakness in the container shipping sector, and difficulties in raising financing.

NOL is raising $1.437 bln (before expenses) via a 3-for-4 rights issue at $1.30 each. The stock closed at $1.53 last Friday, vs the 86.5 cents low reached on 11 Mar ‘09, at the height of the earlier rights issue saga.

1. We would have been surprised if NOL did not take advantage of a strongly improved share price to raise fresh capital, which it needs not only because of its own capex plans, but also because the crisis must bring with it opportunities for it to seize.

2. So investors should put behind them what had happened earlier, reprimand and all, and take up their entitlement in full.

3. What enables NOL to price its rights at such a narrow 9% discount to the theoretical ex-rights price of $1.43, is the full backing of Temasek Holdings, presently with a 67.43% stake.

4. Temasek will not only take up its entitlement in full, it has undertaken to subscribe for any shares not taken up by minority shareholders.

5. In that event, Temasek’s stake will rise to 81.4%. This is however unlikely to happen, what with green shoots sprouting everywhere. NOL’s latest operating statistics (Period 4 from Apr 4 to May 1) showed the decline (in Revenue per FEU) has slowed, basis for our BUY call.

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