In a statement to the Exchange, Neptune Orient Lines (NOL) neither confirmed nor denied rumours of a rights issue. Yesterday, NOL’s shares plunged by as much as 12.7% to an intraday low of $0.89 before closing down 8.3% at $0.935. This was on the back of market talk of a potential rights issue to raise more than US$250 million.

This rumour also comes on the heels of Chartered Semiconductor’s news of a US$300m rights issue, and earlier rights issues at Capitaland and DBS. NOL was therefore construed to be the next Temasek-linked company to raise cash. In its statement, NOL said that: “it wishes to announce that in the course of its business, the company continually evaluates all available options to improve its performance and strategic position. We confirm that the company has not entered into any agreements that would require disclosure in accordance with the SGX-ST listing rules.”

Our analysis of NOL’s balance sheet indicates that it has no immediate need for cash, with gross gearing at 0.5x and net gearing at 0.3x. NOL’s cash balance stands at US$429.2m as at Dec 08. NOL has also scaled back its capacity expenditure substantially, at US$142m in FY09 from US$882m in FY08. Net asset value is at US$1.67 per share, with vessels and container assets of over US$3bn in its books. Price-to-book ratio stands at 0.36x. Despite loss-making operations, NOL also has sufficient facilities at banks which it can draw on to fund its operations. Consensus estimates indicate that NOL will be loss making for the next 2 years.

Fundamentally, we do not see an immediate need for NOL to shore up its capital base. However, NOL may consider fund raising in special circumstances, eg. for a substantial acquisition. Up until last year, NOL had been on the lookout for acquisition candidates, with the last one being its unsuccessful bid for Hapag-Lloyd. However, while there will emerge opportunities for acquisitions in the current depressed market, we believe that NOL will take a more prudent approach in deferring on potential acquisitions, as we do not believe that the shipping market has found a sustainable bottom yet.

NOL’s shares may see a recovery if this latest talk of cash raising does not pan out. Fundamentally, however, we believe that the container shipping market will continue to flounder for at least the next 6 months, along with global trade. We therefore do not expect a sustainable recovery to NOL’s share price, which is down 77% over the past 12 months.