Shipping Trusts – UOBKH

Compelling yield plays for 2008

With uncertainties over the impact of the US economic slowdown on the rest of the world, we advocate taking some position in high yield, defensive earnings stocks. We see value in Singapore shipping trusts, namely First Ship Lease Trust (FSLT), Pacific Shipping Trust (PST) and Rickmers Maritime (RMT). They offer earnings visibility and steady high distribution yields of between 10.2%-12.7%. All three Singapore shipping trusts also continue to trade at a discount to their RNAV and DCF valuations. As such we reiterate our OVERWEIGHT recommendation for the sector.

FSLT. Among the three shipping trusts, FSLT currently has the lowest debt-to equity ratio of 0.38x. The trust has a target long-term debt-to-equity ratio of 1x. As such, future ship acquisitions can be funded by low-cost debt, leading to high yield accretion to unitholders. In Nov 07, FSLT acquired two 47,000DWT product tankers for US$113m. This acquisition had a relatively high asset yield of approximately 12.5% and boosted FSLT’s expected FY08 DPU by 17% from 8.92 US cents to 10.43 US cents. Assuming FSLT’s remaining debt capacity (based on a maximum forecast FY08 debt-to-equity ratio of 1x) to be utilised for ship acquisitions at similar asset yield, the trust could potentially increase its DPU by an additional 3.34 US cents, implying a potential DPU yield of 16.8%. We maintain our BUY recommendation on FSLT with a target price of US$1.22 (S$1.76).

PST. Debt restructuring is PST trump card. Of the three trusts, PST has the most conservative debt repayment structure (straight-line over 10-12 years from IPO as compared to its initial fleet’s remaining economic lifespan of about 26 years). We do not discount the possibility of debt restructuring though PST’s management has no plan to do so currently. PST is currently trading at a FY08 DPU yield of 10.2%. We maintain our BUY recommendation on PST with a target price of US$0.50.

RMT. RMT’s share price fell by 18.9% in the last two months. We have discussed with management this unusual share price weakness that has been specific to RMT and not experienced by the other two shipping trusts. We attribute RMT’s recent share price weakness mainly to selling by some institutional shareholders to raise cash in times of uncertainty. For instance, one of RMT’s cornerstone investors, Fidelity Investments Management has decreased its shareholdings in RMT from 12.97% to 11.6% between early to late-Dec 07.

At RMT’s current share price, it is trading at a FY08 DCPU (distributable cash per unit) yield of 13.7%, the highest among the three shipping trusts and a FY08 DPU yield of 10.7%. Unlike the other two trusts, RMT has a more conservative stance of retaining 25% of its distributable cash for reinvestment whereas the other two trusts pay out 90-100% their distributable cash. RMT is also the most competitive among the shipping trusts in terms of trustee fees and this bodes well for long-term investors. We maintain our BUY recommendation on RMT with a target price of US$1.19 (S$1.72).