Goldman Sachs Research on NOL

The Financial Times reported that NOL may apply for a license to operate rail freight in India. NOL has
not commented officially. License holders will get partial/full access to rail routes, which used to be a
monopoly controlled by Container Corp of India (CONCOR) that ended on Jan 6. We would view such
an infrastructure investment positively, especially in a potentially high growth market like India.
Container shipping is about supply chain management: given increased land-side congestion around
the world, liners that control these assets (terminals, rail, trucks, warehouses, etc) will benefit eg gain
access to higher-yielding customers. We believe the associated capex would not be overwhelming. We
are adjusting down our 2006 and 2007 EPS forecasts by 7.6% and 12.9% respectively to US$0.43 and
US$0.30. We also adjust our target px to S$2.75 (1.3X 06 book, 1X 06 adjusted book) from S$3.55 (1X
06 P/B) to reflect the capital reduction exercise. We rate NOL IL. Risk: a severe global recession.
Forecasts and valuation
Net Income EPS EPS Growth P/E EV/EBITDA Div. Yield Fiscal year ended US$ mn US$ % X X %
12/03A 428.8 0.35 226.2 4.4 3.0 --
12/04A 942.7 0.65 83.5 2.4 1.8 468.8
12/05E 811.8 0.57 (12.8) 2.8 2.4 38.6
12/06E New 624.0 0.43 (24.2) 3.7 2.9 5.5
12/06E Old 675.3 0.46 -- -- -- --
12/07E New 428.9 0.30 (31.3) 5.3 4.2 2.8
12/07E Old 492.5 0.34 -- -- -- --
Source: Company data, Goldman Sachs Research estimates
• India: an important growth market where development has been hampered by infrastructure
constraints. Currently, we estimate India accounts for only 2% of global container movements.
India's share of world exports was only 0.9% in 2004. India's cost of moving cargo is among the
highest in the world at 11% of landed cost, versus the global average of 6%, according to a Drewry
report. For instance, Tata Iron & Steel's figures shows that rail cost (tonne/km) in India is 3X those in
China. This is largely a function of underinvestment in infrastructure. Inland transportation is
important in India, since a large part of manufacturing is located far inland, as opposed to China
where the key manufacturing zones are along the coast. Yet there has been insufficient investment
in railtracks, wagons, warehouses, and so forth. CONCOR used to control the movement of all
containers in India, but its monopoly was ended on January 6.
• New policy sets low entry barriers, levels playing field with CONCOR. The salient features of
the new rail policy include: 1) Rs500 mn registration fees for the arterial Mumbai-Delhi route (which
automatically entitles the operator to other routes connecting the port and hinterland); 2) Rs100 mn
for each of the other routes; 3) minimum networth / revenue criterion of Rs1 bn; 4) no limit on number
of trains; 5) market determined end-user pricing; 6) first come first served basis of dispatch of
Neptune Orient Lines (NEPS.SI) February 15, 2006
Goldman Sachs Global Investment Research 2
container trains; 7) compulsory ownership or access to rail-linked inland container depots (ICD); 8) the operator must procure its own
rolling stock (wagons); and 9) 20-year registration period.
NOL's interest in India has been long-known. NOL's interest in Indian infrastructure projects was first reported in a May 2004 interview by
Singapore's Shipping Times with APL CEO Ron Widdows. At that time, he had indicated interest in investing in India's rail network, possibly
working with CONCOR. The license (based on more recent news reports eg Singapore Business Times) costs between US$2-11.5mn
(depending on whether partial or full access). Others reportedly applying for the license include Pipav Rail, Maersk and NYK. If it does get the
license, NOL's key investments would be in inland container depots (ICD) and railcars. We believe NOL currently has sizeable market share
on high-yielding outbound container cargo from India e.g., textiles. Nonetheless, we estimate that India still makes up less than 10% of NOL's
Asia / Middle East total revenue. Hence the Indian growth opportunity is large since: 1) NOL could win more market share; 2) the market or
"total pie" is also growing quickly.
Capex involved not prohibitive. We estimate that a new entrant would need to invest around Rs2.5bn (US$57mn), assuming it targets 11%
IRR and 5% market share. The calculations are detailed in Exhibits 2 and 3.
Changing target price to S$2.75 to reflect capital reduction. Due to NOL's capital reduction and special dividend payment (S$0.92/share)
that was announced in December 2005, we are adjusting our target price from S$3.55 (1.3X 2006E P/B) to S$2.75. This would imply the
stock trades at 1.3X 2006E P/B, which may seem expensive since at the peak of the cycle in 2004 NOL traded around 1.4X forward book
value. The 2006 book multiple has become more expensive because the capital reduction led to a sizeable decline in 2006 book value. If the
2006 base case book value is adjusted to include the capital reduction, then the implied 2006E target P/B multiple would be 1.0X. Our
S$2.75 target price also implies that NOL would trade at 1.1X 2007E P/B. Furthermore, we believe our target price is supported by a 5.9%
dividend yield in 2006 (based on minimum guided 20% payout ratio, ie not factoring in a further special dividend), as well as ROE of 41% in
2006 and 23% in 2007. Arguably the ROE is boosted by the capital reduction (which reduces Equity), but if adjusted the level is still attractive
nonetheless.
EPS reduction due to lower interest income. In addition, we are adjusting down our 2006 and 2007 EPS forecasts by 7.6% and 12.9%
respectively to US$0.43 and US$0.30. This is primarily due to lower interest income: before the capital reduction we had forecast NOL to be
strongly net cash positive. We now forecast its new 2006 and 2007 net debt/equity ratio to be 40% and 20% respectively, which is where the
regional average is.
Goldman Sachs acknowledges the role of Shilpa Krishnan of Kotak Securities in the preparation of this note.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is
responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies
and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or
views expressed in this report: Julie Lim, Jean-Louis Morisot.
Exhibit 1: Indian railways: registration fees structure on various routes
Export-import rights Domestic rights Bonus Reg fees (Rs mn) Reg fees (USD mn)
Cat I All-India
license
JN Port / Mumbai Port to National capital
region and beyond
All domestic traffic between these routes Any other port to any other
destination
500 11.4
Cat II JN Port / Mumbai Port to any route other
than NCR
All domestic traffic other than Cat I 100 2.3
Cat III Pipavav, Mundra, Chennai / Ennore,
Vizag and Kochi - hinterland
All domestic traffic other than Cat I 100 2.3
Cat IV Kandla, New Magalore, Tuticorin, Haldia /
Kolkata, Paradip and Mormugao to
hinterland
All domestic traffic other than Cat I 100 2.3
Note: Assume Rs/USD exchange rate of 44.

We also adjust our target px to S$2.75 (1.3X 06 book, 1X
06 adjusted book) from S$3.55 (1X 06 P/B) to reflect the capital reduction exercise
Source: Rail Ministry Policy document, Goldman Sachs Research.