Shipping Trusts – UOBKH

Singapore Shipping Trusts

Last week we hosted a roadshow for Rickmers Maritime (RMT) in Singapore and Malaysia. One of the key points raised during the roadshow was whether part of RMT’s dividend yield of 9-10% p.a. was a return of investor capital. Management disagreed with this general perception as RMT is retaining 25% of distributable cash for reinvestment. This differs from First Ship Lease Trust (FSLT) and Pacific Shipping Trust’s (PST) which pay out 100% of distributable cash.

RMT’s management said if the trust were a closed-end fund with no further equity injection, its equity would be intact (and would remain the same as the equity at beginning of the trust) when its initial fleet expires at the end of its economic life, some 30 years hence. By retaining 25% of its distributable cash, RMT’s equity will self-sustaining and invested into new ships. The retention of part of its distributable cash flow will ensure the perpetuity of RMT. We believe at current price, RMT offers great value as investors are effectively investing in a perpetual entity that pays a high dividend yield of 9-10% p.a.

Meanwhile, the other two trusts, PST and FSLT are forging ahead with ship acquisitions. PST recently announced the acquisition of two 1,800 TEU containerships from its sponsor. Pacific International Lines (PIL). These ships will be chartered back to PIL on a bareboat basis for eight years. This acquisition will enlarge PST’s fleet by 16%. FSLT recently acquired two 47,496 dwt product tankers from the Groda Shipping & Transportation group and were concurrently leased back to the sellers on a bareboat basis for a base term of seven years.

We remain positive on Singapore shipping trusts and have included them among our top defensive stock picks for 2008. Their defensive earnings are underpinned by long-term ship charter contracts of fixed charter rates for 5-12 years. Shipping trusts offer net yields of 9-12% p.a. and potential upside from accretive ship acquisitions. Maintain BUY on RMT (Target: US$1.19/S$1.72), PST (Target: US$0.50) and FSLT (Target: US$1.22/S$1.76).