We upgrade Neptune Orient Lines (NOL) from Sell to Neutral. We expect few positive catalysts but aggressive restructuring and cost-cutting in Q408 gives us confidence that risks to our earnings estimates are evenly balanced. At 0.5x P/BV 2009E, we think the stock is fairly valued. We believe a key downside risk is a poor outcome of rate negotiations for transpacific trade. A demand recovery mid- year might improve sentiment but we expect limited impact on profitability.

We believe NOL will have only limited scope to off-hire vessels and will have to manage growing capacity but falling demand on major trade routes. Delayed delivery of newbuildings will help free cash flow. Renegotiating existing charters might lower costs and is an upside risk to our estimates.

We raise our EPS estimates from S$-0.21/-0.17/na to S$-0.18/-0.14/0.10 for 2009/10/11. Our revenue forecasts remain largely unchanged. Management indicated that group SG&A costs have been reduced by up to 25% or US$250m. We lower our cost estimates, which drives the modest increase in our EPS estimates. Our 2009 net loss estimate of US$-264m compares to US$-148m (including US$72m in restructuring costs) in Q408.

We raise our price target from S$1.10 to S$1.20. Our price target is derived using UBS VCAM, assuming a WACC of 8.8% (previously 10.3%). The lower WACC reflects worse-than-expected 2008 results and higher gearing. We estimate a fleet break-up value of S$1.30/1.20 in 2009/10. We lower our DPS estimates for 2009/10 to reflect the new dividend policy.