NOL’s profit estimates for 2011 sink 73%

Market share wars lead to freight rate weakness. The container-shipping sector has experienced mid-cycle correction YTD in 2011, with continuous freight rate deterioration as a result of accelerating newbuild delivery and carrier indiscipline amid the seasonal low demand as well as
increasing risks on the macro front.

Expect losses for NOL in 2Q11. The annual Transpacific rate negotiations will likely result in flat or slightly lower rates and there is no sign yet of a peak-seas driven volume recovery either. 2Q11 will likely be another loss-making quarter for NOL, as well as the industry at large, and though 3Q11 earnings should benefit from peak season surcharges, visibility remains poor at this point.

As such, we revised down our existing freight rate assumptions and cut our FY11/12 earnings estimates by 73% and 51%, respectively. Our EPS estimates are now 67% and 54% below consensus, but we expect further downgrades from the street in coming months. 

Downgrade to Fully Valued; risks remain. NOL’s share price has declined sharply YTD in 2011 (-30%) and has underperformed the broad market as well as most of its peers. While NOL is trading close to book value currently, based on previous downturns, we feel that there could be further downside to levels of about 0.8x P/BV, which is also 1 S.D. below mean.

To recall, NOL’s valuation had tested lows of 0.4x during the recent shipping crisis in 2009. Given that 2Q11 will probably be another loss making quarter and further visibility is limited, we downgrade the stock to Fully Valued at a lower TP of S$1.25, based on 0.8x P/BV