Friday, December 05, 2008
|Friday, 05 December 2008|
| Structural overcapacity push shipping industry into loss. The combination of falling freight demand and a record order book (52% of the world’s fleet) have added to overcapacity; risk stems from rates staying below breakeven levels and pushing Dry bulk and Container companies into default in 2009. DnB NOR and Nordea are large shipping lenders, and we expect losses in their shipping books (180bp) over the next two years. This is below previous peak losses of 200bp due to more diversified books and better covenants. In addition, 60% of Dry bulk contracts are covered in 2009, which can buy ship owners time.|
Dry cargo and Container as dire as the Tanker market in the 1980s. There is roughly 20% overcapacity in Dry Cargo and 10% in Container market and freight demand is falling as the world enters a recession. We believe Dry cargo and Container markets could become as dire as the Tanker market of the mid 1980s, when rates were below breakeven levels and in some cases “zero dollar day rates” were seen. We expect a default level above 10% in these two segments and 30% loss severity, yielding annual credit loss levels above 3% for 2009 and 2010.
However, we believe there is less risk in the Offshore and Gas segments, which make up around 30% of shipping books. They are less correlated with world trade and are driven by structural growth in oil and gas exploration. Our understanding is that these projects are financed at breakeven levels of USD30 to USD40/barrel.
DnB NOR downgraded to Hold; reiterate Sell on Nordea. DnB NOR’s shipping book is 12% of lending and Nordea’s is 5%, but their overall risk is similar. DnB NOR is more exposed to risky areas -- Dry bulk / Container, at 26% of the book vs. 14% in Nordea. However, DnB NOR also has higher exposure to less risky areas, such as Offshore / Gas, which is 36% of the book vs. 28% in Nordea. We cut Nordea’s EPS by 10% for 2009E and 10% for 2010E, lower the TP by 17% to EUR4.8, and reiterate Sell. We downgrade DnB NOR’s EPS by 10% for 2009E and 7% for 2010E and lower the TP by 27% to NOK37. Although DnB NOR already trades at a significant discount valuation (0.5x tangible book, 45% below EU peers), we downgrade from Buy to Hold.
SOTP valuation based on sustainable RoE/growth and CoE. We use a SOTP methodology to value Nordic banks, based on sustainable RoE/growth and CoE. We use PE models where applicable. This report changes ratings, price targets and/or estimates for DnB NOR and/or Nordea.
As adapted from Bolsamania