Muted peak season, as expected. NOL reported headline net profit of US$20m in 3Q13, compared to our expectations of about US$12m, but this includes about US$34m realized forex gains, and hence results are slightly worse than expected. Liner volumes were down 5% y-o-y, and interestingly 5% q-o-q as well, despite it being the traditional peak season.

Intra-Asia volumes were the worst affected (down 12% q-o-q) as were Intra-Asia rates (down 7% q-o-q), possibly due to the cascading of capacity from the mainlanes. Asia-Europe rates recovered on average by 10% q-o-q as a result of the rate restoration programmes in June-July, and combined with NOL?s cost control measures, resulted in better operating performance compared to 2Q. However, profits are likely to be short-lived, as we explain below.

Rates are quickly back to the bottom. We had highlighted earlier that we do not expect the July rate increases to stick beyond 3Q. As it turned out, spot Asia-Europe rates started falling sharply from end-August and at US$661/ TEU now, are down 60% since early August. The rate plunge is largely due to carriers? failure to keep capacity in check, with the introduction of new 13,000-18,000 TEU ships in the last few months.

Though liners have variously announced rate increases ranging from US$600-1,000 per TEU from 1st November, we expect the impact to be short-lived, as no capacity reduction measures for the low season has been announced, unlike last year, when Maersk, G6 and CKYH Alliances had taken off loops.

Daily Chart

Unfavourable demand-supply dynamics continue to persist. We keep our numbers relatively unchanged and maintain our HOLD call on the stock, with an adjusted TP of S$1.10, pegged to 1.0x FY14P/BV. Despite hopes of a slow economic recovery, we do not think NOL will be able to achieve normalised returns before FY15, given the influx of capacity still scheduled to enter the industry, going forward. (Read Report)