NOL - Premature to Turn Positive

Apr-09 data remain weak — Rates continued to head lower by 1% MoM and 21% YoY on lower core freight rates and lower bunker recovery. Volumes +2% MoM, -22% YoY led by decline across all major trade lanes; strong MoM volume upticks in Feb/Mar-09 have eased. See Figures 2 and 3.

Port data points not encouraging — While we believe NOL’s losses peaked in 1Q09, continued weak ports data into 2Q09 suggest recent optimism on a turnaround in container shipping is premature at this stage. Our US transport analyst, Matthew Troy, in his 18-May US/Asia port monthly report, noted that sequential deterioration in rate of decline in port container volumes contrasted sharply with Feb/Mar improvement. Our China transport analyst, Ally Ma, observed “no sequential improvement in container throughput from China ports in first 2 weeks of May, following the deep Apr reversal of previous uptick in March” (see her report on 19-May). Singapore ports data showed a similar reversal in container throughputs trends in April. See Figures 4, 5 and 6.

Watch out for cash call — NOL’s strong share price rally of 61% since its Mar- 09 low provide a window of opportunity for equity issuance to plug funding gap (recall that debt was drawn down to plug negative operating cash flow in 1Q09 when capex was negligible), reduce gearing, or build up cash hoard for future M&A opportunities. Rights issue by NOL cannot be ruled out in light of recent cash calls by other Temasek-linked companies as well as shipping peers.

Other reasons not to own NOL – 1) Industry oversupply from near record high order book and idle vessels; 2) book value erosion from persistent losses.

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