NOL has released its monthly operational update for period 7 (27th June 2009 to 24th July 2009). Volumes declined 11% year-on-year while average revenue per FEU declined 28% to $US2,219. The improvements in the volume second derivative has been the most stark (it was down 22% in period 4) and it is now down 22% year-to-date. However, as expected, the rate recovery has been insipid as we enter the peak season. Average rates were up just 1% month-on-month and the absolute rates remain roughly in-line with 2002 levels.

We expect the volume recovery to continue In our view, the volume declines across the cargo industry have been accentuated over the past year by de-stocking in North America and Europe. This appears to be coming to an end. Therefore, as end-demand becomes satisfied from production rather than inventories, we expect this to lead to an ongoing recovery in volumes.

Rates are likely to be trapped at just above EBITDA of zero However, we think the scale of the over-capacity (order-book + idle fleet) in the container industry will trap rates at just above industry EBITDA of zero. We estimate that approximately 10% of the global fleet is currently idle and we expect this capacity to return to service if cash returns become available. This leads us to think that accounting profits for the industry are unlikely until 2012 at the earliest.

Valuation: price target implies a 2010E price/book of 0.7x Our price target is DCF based, explicitly forecasting key valuation drivers using the UBS VCAM tool.