atans1

NOL: Don’t buy it for the wrong reasons

In Economy, Investments, Temasek on 21/01/2010 at 5:27 am

NOL’s and other container lines’ shares are in demand, with the recovery in world trade expected to lift freight rates despite the surplus of ships. “[M]ore than a tenth of the vessels that transport the world’s manufactured goods in containers are idle. For most, orders to sail will not come for some time.”

(Aside, NOL tried not order new ships when David Lim returned to NOL, after a stint as an acting minister. He tot the other liners were crazy to order new ships despite a surplus. But in the end, NOL too joined in because the ordering frenzy continued. Sadly, it did so  juz before the market turned, but didn’t order as many ships as its bigger competitors, though as it ordered late, it paid higher prices.)

Buy into NOL because of its operational gearing into a recovery, not because it is a highly geared financial play into shipping (it isn’t) or because it can buy cheapish assets and gear up (it’s not a buccaneer).

Short of plans to buy assets, NOL did not need the S$1.4b in raised last year. NOL, which had then S$400m in cash reserves, would have almost less than 2% net debt (45% of equity at the end of 1Q of 2009) against container sector average between 60 and 6 then

NOL intended to use about S$700m  for investments and working capital, the remainder to repay debt.

So NOL was in a good position to buy ships at bargain prices from highly leveraged shippers in distress, and shipyards. And increasingly its gearing again in the process.

Imagine going into the next cycle with cheaply acquired ships and a gearing of 45%. Wow Bam. This didn’t happen. NOL is one of the most conservative container lines and took a higher proportion of its ships out of service than other lines to tackle over-capacity.

Moral of story –.

And one hopes it doesn’t try to fly by buying ships in a rising market.

There are the Greeks and Chinese buccaneers out there too on the prowl for ships. The only problem is they are geared above the safety lines on the sides of their ships. But in a rising market, they can borrow more. And a rising market means ship-owners and shipyards will be reluctant to sell.

(Writer has some NOL shares in his CPF portfolio.)

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