Stormy seas ahead: NOL may skip dividends in 2012

Lower than expected freight rates for P10 & P11. NOL’s reported weaker than expected freight rates for P10 & P11. The company had attributed the decline in freight rates to “lower rates in the major trade lanes” in both the statistical updates. Being a price taker on Asia-Europe routes, we expect poor performance on this trade lane to be the key driver for this deeper than expected slump. According to the Journal of Commerce, Asia-Europe freight rates dipped a further 2%w-w in the second week of December to US$490 on the SCFI, the lowest level ever on the index. We interpret this weak data point as a poor end to the year in P12 for NOL.

Sequential Decline in Weekly Volume. Adjusting NOL’s data to reflect weekly data on the periods disclosed, we also observed relatively weak volume for P11. The weekly volume recorded a 7% sequential fall, or a growth of merely 1.5% y-y, to 56k FEU/week.

Valuation. We value NOL based on a P/B value methodology, from the regression of our forward ROAE forecasts with its historical values. We derive our target price of S$1.36 based on 1.01X FY12e BVPS of US$1.07 and translating it at an exchange rate of 1.26SGD/USD. We do not expect any dividend to be paid out over the next 12months based on our forecast of a full year loss for NOL. With potential weakness on the economic front posing further risks to global trade outlook, we choose to stay on the sidelines for now. Downgrade to Hold.

Recent stock price rally could be due to strong US Economic data. With its large exposure to the US, NOL’s operating performance is highly dependent on the economic outlook for the country. US economic data reported recently had been positive. Retail sales advanced 0.2%m-m in November and 120k non-farm payrolls job adds, led to a decline in unemployment rate to 8.6%. However, our Strategist, Joshua Tan, remains skeptical over developments in the US, as the gradual withdrawal of fiscal supports would be a drag on disposable incomes. In particular, CAPEX incentives, payroll tax cut, extended unemployment benefits are all up for renewal this month. Non-renewal of these fiscal supports could lead to a reversal in the recent positive economic performance.