Assume coverage with HOLD, TP: SGD1.25. Following a change of analyst, we assume coverage of NOL with a TP of SGD1.25 based on 1.1X FY13-14E BVPS (long-term average: 1.2X). Fundamentally, we believe that the container shipping industry is near its cyclical trough and expect better times ahead as the supply overhang improves over the next few years. However, we remain cautious in our recommendation as the prospect of a third consecutive year of losses (on our estimates) will likely weigh on sentiment towards the stock. Furthermore, we believe consensus expectations of a profitable FY13 will be missed.

Consensus remains too bullish. After adjusting for the one-off gain on the disposal of a building, we forecast a third consecutive year of losses in FY13, to the tune of USD182m. We believe that consensus numbers may not have fully reflected the weak rate environment this year and expect earnings downgrades to trickle through. We expect losses to widen sequentially in 2Q13E, to approximately USD160m.

Container shipping industry currently at the trough, in our view. Freight rates continue to be under pressure as industry oversupply is exacerbated by ongoing vessel deliveries. On the plus side however, a high rate of vessel demolitions recently has led BIMCO, a shipping association, to revise its full-year fleet growth estimates to +6.1% from +7.4%.

Better times ahead, but still too early to get in. We expect industry oversupply to ease from FY14E onwards as vessel deliveries slow. Compared to a pre-crisis high of 58%, vessels on order have moderated to only 19% of existing fleet in the industry. As vessel oversupply is the primary cause of pain in the industry, a moderation in future supply growth would be the best gauge of better industry prospects, in our view. With the ongoing delivery of new vessels, we expect NOL to return the majority of charters expiring over the next two years. This would bring its net fleet growth to 2% and 5% YoY in FY13E and FY14E respectively, and lower the percentage of fleet chartered to 31% (Dec 2012: 59% chartered).

Source: Maybank Kim Eng Research - 8 Jul 2013