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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STX Pan Ocean - notwithstanding a short-term rally in the BDI

According to the management, the Baltic Dry Index (BDI) has bottomed in Dec 08. STX Pan Ocean (STX PO) has an operating fleet of 306 vessels. Out of which, 70 are owned and 236 are chartered-in vessels.

Of the chartered-in fleet, 206 are dry bulk vessels. Twenty two of these have a hiring period of more than one year and the others are chartered out for an average period of three months. Due to the high chartered-in cost for nine dry bulk vessels and low profit margin for its chartered-in fleet, the management expects a recovery in earnings in 2H09. These nine vessels were secured when BDI was at 3000-4000 level.

Twelve vessels are scheduled for delivery in 2009 and 2011 while 18 vessels are scheduled for 2010. STX PO has not cancelled any of their vessel orders but they are looking to delay some of the deliveries for 6-18 months.

For the US$600m CAPEX allocated for 2010, the Company has secured US$70m financing and have issued Corporate Bonds of KRW200b on 8 May 09 (US$157.5m) at an interest rate of 7.95%.

In our opinion, notwithstanding a short-term rally in the BDI on China's higher iron ore imports, freight rates will likely be soft when vessel oversupply hits the market from 2H09 onwards. Maintain SELL and fair price of S$4.35 based on 0.4x P/B (a typical shipping cyclical trough valuation).

SingTel: Possible 4Q09 earnings surprise

Upbeat 4Q09 results likely. SingTel is due to report its 4Q09 results on 14 May before market opens. We had earlier expected revenue to show a modest QoQ decline (<5%) as we expect the economic slowdown to exert a slight toil on its business; the weaker AUD is also expected to negatively impact its consolidated revenue. But based on the relatively upbeat quarterly results from its peers MobileOne and StarHub recently, as well as the strong 4Q09 results from 33%-owned associate Bharti Airtel, we may see better- than-expected showing from SingTel. Another area of earnings surprise could also come from forex gains, as the regional currencies have appreciated some 2-5% against the SGD over the quarter.

Systems are go for NBN. Separately, the Infocomm Development Authority (IDA) recently announced the successful achievement of the contractual and financial close (CFC) by OpenNet, the NetCo of the NBN (national broadband network). SingTel has a 30% stake in OpenNet. As such, OpenNet has now obtained its Facilities-Based Operator License for it to commence the roll out of the NBN, where the plan is to achieve 60% coverage of all residential premises and non-residential buildings by end-2010, and 95% of all residential premises and non-residential buildings by 2012.

Divestment of SingTel's underground assets. The IDA has also approved OpeNet's implementation plan of the AssetCo, which will be established as a business trust within 24 months of the CFC, and will own and control the relevant underlying passive infrastructure assets that are used to support OpenNet's deployment. SingTel will transfer these underlying assets to the AssetCo; it will also need to reduce its unit holdings in the AssetCo to less than 25% within 60 months of OpenNet's CFC. We view the move positively as it would allow SingTel to monetize its assets.

Room for upward revision. In line with the recovering equity markets around the globe, we note that share prices of its listed associates have also risen over the quarter, with Bharti up as much as 16%. However, we are still not entirely convinced that a sustainable recovery has taken place, as the economic fundamentals continue to lag the sharp rally in share prices. Still, should the global economic recovery come earlier and stronger than expected, we see room to raise our FY10 estimates. For now, we maintain our SOTP fair value of S$3.09 until we see the 4Q09 results. In the meantime, we retain our BUY call.