NOL turning the crimson tide

Target price: SGD1.35


Expect 3Q2012 back in black. We expect NOL to record its first quarterly net profit when it reports results on 25 Oct, after posting six consecutive quarters of losses. We believe this will be a positive catalyst for the beaten-down stock and will mark a defining quarter in NOL’s recovery out of the container shipping slump. We expect NOL to benefit from 3Q’s freight rate recovery to post a net profit in the region of USD50m, building on its liner operating profit posted in 2Q2012. We maintain our BUY recommendation on NOL as a proxy to the global economic recovery, and maintain our Target Price at SGD1.35, pegged to 1.2x 2013 P/BV.

Watching its freight. NOL’s average revenue / FEU would be a key metric to watch, as it represents its market strength relative to the China Containerised Freight Index (CCFI). NOL’s average freight is better correlated to movements of a one-month lag of the CCFI, and the increase of ~10% QoQ reported for 3Q2012 forms our basis of the improved freight forecasts for NOL. 3Q usually represents a seasonal peak in freight rates as holiday-season shipments move into full swing.

Further upside could emerge from HQ sale. We also estimate that the impending sale of the NOL Building could net NOL one-time gains of USD100-200m. While we prefer to exclude this from our forecasts for now, the potential upside of 4-9% to NOL’s NAV could provide a further jolt to NOL’s share price. The timing could be right for NOL to reap gains from a non-core asset and use the cash proceeds to strengthen its balance sheet.


NOL’s time to shine – reiterate BUY. While 3Q could be a peak in terms of freight rates, we see this as a defining quarter for NOL’s recovery out of the container shipping slump. We maintain that NOL’s strength in the Transpacific trade, leaner structure, with more fuelefficient vessels coming on-stream, puts it in good stead to benefit from the recovery. We advise investors to make an early entry to benefit from the industry up-cycle – reiterate BUY, Target Price: SGD1.35.

Expect 3Q back in black Freight uptrend to pull NOL out of the woods. While not a perfect predictor, our regression model of NOL’s average freight against movements of the CCFI project a 5% QoQ increase for NOL’s average revenue / FEU to ~USD727 for 3Q2012. Container volumes handled are forecasted to continue the trend of showing only a slight 1% increase over those handled in 2Q2012. These two metrics combine to form our basis for top-line projections in 3Q2012 of USD2.45b.

Fuel still trading range-bound.
Fortunately for NOL, bunker fuel prices have not mirrored the recent rise in freight rates, with spot prices dipping approximately 2% to USD647/tonne in 3Q2012. Our expectation is that bunker prices will remain range-bound between USD600-700 / tonne, and that NOL will continue to manage these heightened bunker costs through built-in fuel-price adjustments in contracts and its own contract-independent fuel hedges.

Cashing in on the family home. NOL’s sale of its Headquarters at Alexandra Road is reportedly close to completion, with The Business Times reporting prices in the high SGD300m (USD245m) range received for the freehold property. However, it remains to be seen if buyers are willing to meet NOL’s SGD400m (USD330m) asking price.

Using existing valuations of neighbouring PSA Building (NLA psf: SGD1,100), and NOL Building’s existing NLA of 207.5k sqft, an estimated base valuation would be closer to USD200m. This conservative sale price would already translate to a ~4% increase in NOL’s NAV. There is also the scenario of a buyer redeveloping the site to maximise its NLA, and in the process, justify a higher price. We provide an analysis of a range of possible sale prices below, and show that its potential impact to NOL’s NAV could be as high as 9%.