NOL Sell: Don’t Ride This Dangerous Beta Play

1Q09 results in-line with our expectations — Revenue -33% qoq, -36% yoy, and makes up 21% of our full-year estimate, while net loss of US$245mn was in-line with the company’s earlier guidance. Volumes (-27% yoy, -16% qoq) were also in-line and make up 21% of our full-year estimate. We expect 1Q09 to be peak losses, provided recent volume upticks in Feb/Mar prove sustainable.

Plugging cash flow gap with debt — 1Q09 net gearing rose to 0.45x from 0.33x in Dec-08 with US$183mn additional debt, offsetting negative operating cash flow of US$139mn. About US$300mn revolving facility was reclassified as long-term debt; short-term debt stands at US$139mn, and we believe this is likely to be refinanced. We expect gearing to reach 0.7x by year-end as more debt is drawn down to plug negative operating cash flow. 1Q09 capex of US$14mn was only 10% of full-year guidance of US$142mn capex, but offset by US$10mn proceeds from fixed asset disposal. We expect capex prudence to continue.

Counter-arguments to the beta exposure — Shipping stocks are usually a direct proxy to the “green shoots” economic recovery story, but we believe the current unprecedented over-supply situation will limit upside to earnings recovery and share price rally: 1) improvement, or optimism, in demand fundamentals will slow the rate of supply correction, prolonging the duration of the downturn; 2) share price rally will lower cost of equity, and an equity offering could become a viable solution to plug funding gap or reduce gearing.

Sell — We see no reason to own NOL at the moment given: 1) book value erosion; 2) higher cash flow needs suggest rights issue cannot be ruled out.

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