Rating downgrade from Buy 2 because of valuation
We are downgrading our rating on NOL from Buy 2 to Reduce 2—the share price
is above our 12-month price target of S$4.80. Our price target and earnings
estimates remain unchanged, as we believe there has been little additional news
flow. In a report dated 20 June 2007, we discussed the possibility of OOIL bidding
for NOL. We would not expect any potential offer price to significantly exceed
current price levels.
We expect low profitability in the H107 results
We estimate 55% of revenue is from trans-Pacific trade. New trans-Pacific
contracts were only effective 1 May, so the H107 results will bear the burden of
lower 2006 contracts. A higher base effect is likely to have resulted in the
operating results being down YoY, in our view, although there should have been
an improvement in Q2 from Q1.
Short-term risks are now skewed to the downside
NOL now trades on 1.8x 2008E P/BV and 1.3x if our valuation of port assets is
excluded. We believe this is high, as we forecast just 4% net profit margins for
2007 and have a neutral sector view. We believe regional carriers maintain a
cautious outlook for trans-Pacific trade and that the current share price leaves no
scope for disappointment.
Valuation: S$4.80 unchanged, core liner business valued at S$3.30
We attributed S$1.50 to the value of the US port assets and S$3.30 to the core liner
business. As noted in our report of 25 May 2007, NOL management has not
confirmed any transactions of port assets will occur and does not provide financial
data relating to these assets.
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