Neptune Orient Lines - Too early to buy (DBSVickers)

HOLD S$1.14 STI : 2,832.13

Upgrade from FULLY VALUED

Price Target : 12-month S$ 1.11 (Prev S$ 1.15)

Reason for Report : Comparisons vs. last crisis

Potential Catalyst: Improvements in macro data, higher freight rates

DBSV vs Consensus: Our FY11/12 EPS estimates are below consensus on lower freight rate assumptions

• Weak operating environment reflected in 50% YTD plunge in share price

• Less downside to rates/asset values expected compared to last crisis in 2008-09 though

• Underperformance could be limited hereon; upgrade to HOLD with TP of S$1.11

• Bear-case TP of S$0.85 if economic woes worsen

Less downside than 2008 crisis. Compared to the last crisis in 2008-09, we believe the industry supply-demand gap looks more balanced at this point, and there is less downside to current asset values and freight rates than back in ’08. One key concern for NOL now is the higher capital commitments after the 2 recent rounds of new mega vessel orders, which could drive its gearing up to unsustainable levels. Any prolonged losses in the difficult operating environment could lead to a potential cash call. However, the 50% YTD share price decline seems to have adequately priced in the negative sentiments associated with the stock as a proxy to slowing world trade/GDP growth.

NOL’s underperformance is steeper this time around. In the first 10 months of 2008, NOL share price had plunged 69%, rather similar to the YTD trend in 2011. However, relative to the broader STI, NOL share price slid further YTD in 2011 than in 2008, suggesting that NOL may be oversold at these levels. However, we think it is still too early to buy, as economic indicators remain weak and the CCFI freight rate readings remain uninspiring in what is currently supposed to be ‘peak season’. At best, we expect share price to move in line with index, as we saw after the lows of October 2008.

Upgrade to HOLD, given the above conclusions. We maintain our net loss projections of US$126m and US$48m for FY11/12 under our base case scenario, which calls for slower growth in US/ EU but not an outright recession. Our TP of S$1.11 (revised for a weaker US$ assumption) is based on 0.8x P/BV, or 1 SD below mean. In a bear case recessionary scenario, we estimate deeper net losses of US$208m/ US$530m for FY11/12, and our bear-case TP of S$0.85 is premised on 0.6x P/BV.