NOL - Volumes Up, Rates Down

Mixed signals: where to from here? — Volumes improved sequentially (-14% YoY in Jun-09 vs. -21% YoY in May-09) but rates worsened sequentially (-29% YoY in Jun-09 vs. -23% YoY in May-09) – we believe the latter could be due to erosion of rate hikes implemented in Mar/Apr-09. Recent statement by TSA on a “voluntary guideline” to raise Asia-US rates by US$500/TEU provides hope for a short-term reversal in rate decline in the coming months.

Bulk hot, containers cold — Our PRC Shipping analyst Ally Ma prefers bulk over container players as supply-demand dynamics are improving for dry bulk but not for container players (see her report, PRC Shipping – Bulk Hot, Containers Cold). While liners may have seen the worst, a rapid recovery is not on the cards due to shaky global consumption and a large inventory overhang.

News flow direction — We maintain our view that signals in the container shipping industry will be mixed with a positive bias: rate hikes and seasonal volume upticks may bring short-term cheer to the market and temporarily support valuations – however, we think any significant hike in rates is likely to be eroded due to vessel over-capacity. Liners may make repeated attempts to jump-start rates from “unsustainably low” levels.

M&A angle differentiates NOL from other liners — We maintain our Buy/High Risk (1H) recommendation mainly due to NOL’s ability to leverage its strong balance sheet position to acquire vessels or networks. NOL now trades below its historical P/B valuation; we maintain our S$2.00 target price based on 1.3x FY09E P/B, similar to levels seen in 2002 recovery.

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