Raising S$1.4b via rights issue. Neptune Orient Lines Ltd (NOL) has proposed a rights issue to raise net proceeds of S$1.4b. The group is offering 1.1b rights shares at S$1.30 each on the basis of three rights shares for every four shares held. The issue price represents a 15% discount to the pre-suspension price and a 9.2% discount to the theoretical ex- rights price. The group's major shareholder Temasek Holdings has undertaken to subscribe for its pro-rata entitlement and will sub-underwrite the rights issue. In our view, the rights issue is an opportunistic move by NOL to take advantage of favourable market conditions given that it has no near term refinancing needs.

Funds used for debt repayment… NOL will use 50% of the net proceeds to repay debts, while the balance will be earmarked for potential acquisitions and general corporate purposes. We estimate that the debt repayment could result in interest savings of US$15m in FY09. Credit lines will remain available to the group after it repays its debt. The rights issue will boost NOL's balance sheet tremendously. Assuming that the issue was completed in 1Q09, the group's net gearing would have been lowered to just 0.02x, down from 0.45x.

… and acquisitions. Management refrained from elaborating on its acquisition plans, but mentioned that it would capitalise on investment opportunities that enhance the group's competitive position when the industry recovers. We postulate that the group may be on the lookout for companies within the containerships or logistics industries that haven fallen to distressed valuations. Mergers and acquisitions are the quickest way to gain market share in the containership industry, and this is in line with NOL's strategy of strengthening its presence in the global containership industry.

Upgrade to HOLD on inorganic growth potential. In our view, the rights issue is a timely move by NOL to recapitalise in anticipation of weak operating cash flows in FY09 and FY10. The group's ability to raise substantial funds amid tight credit markets allays financing concerns. More importantly, with its enhanced financial flexibility, NOL can now review acquisition opportunities that were previously unavailable to it due to lack of credit. While we remain cautious over the shipping industry's outlook, NOL's stronger financial position and the enhanced likelihood of inorganic growth have prompted an upward revision of our rating. We upgrade NOL to HOLD and raise our fair value estimate to S$1.63 (prev S$0.815) based on 0.8x FY09F NTA, in line with its peers. Our ex-rights price will be S$1.39.