Deterioration across the board. All three business segments posted weaker YoY results. NOL's main revenue contributor, the Container Shipping segment, turned in operating losses of US$142m (vs. a US$59m profit a year ago), while the Logistics and Terminals segments remained mildly in the black. Container shipping revenues fell by 38.5% YoY to US$1.2b as slower global trade flow crimped freight rates and volumes. NOL, along with its industry peers, has been trying to implement rate hikes, but overcapacity, especially along the Asia / Middle East route, has posed a challenge to these efforts.
The silver lining. We are mildly sanguine about the outlook for 3Q09, a seasonally strong quarter. NOL highlighted that the operating environment showed signs of stabilisation in the later stages of 1H09; volumes have bottomed out and demand has somewhat improved, possibly due to inventory restocking. While it appears that the worst could be over, management cautioned that visibility remains low. It remains premature to determine if the improvement seen so far can be sustained. Meantime, management remains committed to cost containment in the face of stilldeclining revenue.
Well positioned to endure turbulence. We reiterate our view it remains too early to call for a recovery in the containerships industry. Muted global trade, persistent unemployment and industry oversupply continue to dampen hopes of a recovery. Nevertheless, NOL is poised to weather the downturn given its strong financial position. With the US$1b proceeds raised from its recent rights issue, the group is ready to capitalize on investment opportunities that may arise. We believe that NOL could be on the lookout for distressed acquisition targets that can boost its market share upon economic recovery. We roll over our valuations to blended FY09/10 NTA and remove our 20% discount in light of improving outlook, bringing our fair value estimate to S$1.68 (previously S$1.39). Maintain HOLD.
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