NOL is well managed and focused on profitability. Its latest cost-cutting initiatives should help mitigate some of the pains in thecurrent down-cycle. That said, with deteriorating operating marketenvironment, NOL will be loss-making in FY09E, in our view. Wemaintain our NEUTRAL with new target price of S$1.10.

We have lowered NOL’s earnings on weaker volume and rates,and expect US$94 mn loss in FY09, and cut FY2010 earnings by64% to US$114 mn. While we think downside is limited, we seeno near-term company specific catalyst. Nevertheless, the stockwill also benefit if global trade demand recovers in 2H09E.

Our new target price of S$1.10 (S$1.70 previously) implies 0.5xforward P/B. This is similar to its 2002 trough but just above the1998 trough. We think this is justified, as back then, NOL wasmaking a bigger recurring loss of US$254-330 mn, and hadweaker balance sheets (net gearing of 14x and 422% in 1998 and2002).

NOL’s October volume fell 8.6% MoM, but the blended freight ratewas actually at historical highs in October (due partly to fuelsurcharges), and NOL is still profitable in 3Q08. China ContainerFreight Index (CCFI) correlated highly with NOL blended rates historically, and the recent divergence is due to NOL’s success inimplementation of fuel surcharges and the contractual nature of NOLbusiness. NOL has more contracts (either on a three-month or one-year) and limited spot business, and we think the decline in spot rateswill have a more pronounced effect in the next few quarters.Management is guiding a 4Q08 operating loss.

NOL has taken proactive steps to cut costs, by cutting capacity(through returning its charter fleet and laying up ships), and reducing1,000 headcount globally. We think these, plus collapsing fuel prices,could cut operating costs by US$500 mn plus, but would still beunable to offset the US$2 bn fall in revenue on lower volumes andrate assumptions.

NOL is on 0.4x forward P/B, historical trough level and 48% discount to its NAV of S$2.0/share. There is cheaper (e.g. OOIL on 0.2x F P/B)or higher leveraged play (e.g., CSCL) in the sector.