Neptune Orient Lines - Period 7: Volume and Freight Rate Deterioration Have Bottomed

Quick Comment: NOL’s Period 7 volumes improved 9% sequentially from Period 6 while freight rates increased a marginal 1% from Period 6. This reaffirms our view that container shipping volumes and freight rates could have bottomed and are poised for a mild recovery in the Jul-Oct peak season. This is because rates are unsustainable at below-cash breakeven and container volumes could see easier comparisons with 2H08 and gradual improvement in consumer demand. Conversely, we do not expect any sharp improvement in freight rates as laid-up capacity (~10% of global fleet capacity) will be reactivated should this occur.

What’s New: In Period 7 (June 27 to July 24, 2009), NOL reported an 11% YoY volume decline, reflecting lower volume deterioration than in Period 6 (down 14% vs. 1H09 decline of 23%), which implies 9% MoM volume improvement for Period 7 vs. Period 6. Period 7 average freight rates declined 28% YoY to US$2,219/ FEU, but on a sequential basis, rates increased 1% in Period 7 from Period 6. We think that the lower volume deterioration in Period 7 reflects a slow recovery in consumer demand and inventory restocking during the peak season. The stabilization in freight rate deterioration can be attributed to improving Asia to Europe freight rates (rate hikes for July were largely successful), offset by the commencement of annual Transpacific contracts with rates down sharply from prior-year contracts, in our view. The 11% volume and 28% freight rate deterioration resulted in a revenue contraction of 36% for Period 7.

Investment thesis: We believe NOL is well positioned to weather the container shipping downturn thanks to a strong balance sheet and experienced management team. Conversely, we believe that current valuation of 1.2x 2010E P/BV, above the historical mean, is rich and factors in the bottoming of rates and volumes.

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