Published June 4, 2009

Analysts upbeat on NOL's $1.4b rights issue

They believe the company will use the funds to acquire distressed assets

By JAMIE LEE

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ANALYSTS were largely positive on news of Neptune Orient Lines' (NOL) $1.44 billion rights issue, with some upgrading their ratings for the stock.

The rights issue at $1.30 apiece represents a 15 per cent discount to Friday's closing price of $1.53.

The national shipping line said that it would offer a three-for-four rights issue at $1.30 apiece, representing a 15 per cent discount to last Friday's closing price of $1.53. The stock rose further to end at $1.75 yesterday.

Analysts believe that NOL would use the funds to acquire distressed assets.

CIMB-GK analyst Raymond Yap said in a research report that NOL was 'preparing for the hunt' and raised his rating to 'neutral' from 'underperform'. 'The likelihood of NOL using planned rights proceeds for M&A deals is high,' he said, adding that NOL is targeting a 'material' acquisition, especially given the sharp fall in the value of ships and shipping companies.

Based on an assumed debt-to-equity ratio of 40 per cent, NOL has some US$2.5 billion - including funds raised from its rights issue and its US$1.5 billion of debt - for acquisitions, said Mr Yap.

'The worst looks over,' said Citi Investment Research analysts Rigan Wong and Horng Han Low, who upgraded the stock to a 'buy' from 'sell'.

Besides wiping out the funding risks, NOL's rights issue also comes at a time when container shipping rates and volumes appear to have bottomed, the analysts said in a client note.

They estimate a maximum share dilution of about 20 per cent following the rights issue.

OCBC Investment Research analyst Lee Wen Ching said it may be premature to call a bottom in the shipping cycle as excess capacity remains and is expected to create an overhang on freight rates. But Ms Lee also raised her rating to 'hold' from 'sell', on M&A potential.

Most analysts also saw the fall in net gearing to close to zero as a positive move.

NOL reported a slide of more than one-fifth in both volumes and average revenue for the period April 4 to May 1. It posted a US$244.6 million first-quarter net loss, against a US$120.7 million net profit for the year-ago period.