FSL – UOBKH

FY07: DPU in line with expectations

First Ship Lease Trust (FSLT) has announced its FY07 results. Earnings came in at US$6.3m, 17.9% below our calculations mainly due to differences in calculation of depreciation (unlike the other shipping trusts, FSLT has a depreciation policy based on cost vs estimated residual in the 20th year) and amortization of debt upfront fees. Overall distributions per unit (DPU) announced for the period came in at 6.95 US cents, 2.1% below our estimated DPU for the year but spot on with management’s guidance following their Nov 2007 acquisition of 2x 47,000DWT product tankers.

Quarterly DPU to be made on 22 Feb 2008

FSLT will be paying out a distribution of 2.42 US cents for 4Q07 which is in line with management’s guidance, following the acquisition of 2x 47,000DWT product tankers in Nov 2007 and 13.6% above the projected distribution at IPO. Investors are advised to take note of the following dates:

• 22 Jan 2008: Ex-distribution date
• 24 Jan 2008: Books closure date
• 11 Feb 2008: Deadline for unitholders to complete and return the Distribution Election Notice to CDP in order to receive distributions in US dollars
• 22 Feb 2008: Payment of distributions.

Appointment of US Investor Relations

FSLT has announced that it has retained the IGB Group as its US investor relations and financial communications agency in order to increase its visibility among US based investors and financial media. We view this as a positive for FSLT as US investors have a greater appreciation for shipping trusts. Seaspan and Danaos, the two shipping trusts in the US originally started out like the shipping trusts in Singapore, trading at a DPU yield of between 8.5-9.0% at listing. Continued accretive acquisitions lead to a re-rating of the sector resulting in yield compression to between 5.5-6.0%. Currently the US shipping trusts are trading at a DPU yield of between 7.5-7.9%, much lower than FSLT’s current 12.6%.

Stable and visible distributions: Maintain BUY

We continue to like FSLT for its stable and visible distributions which are supported by its long term timecharters of between five to eleven years. Among the three shipping trusts, FSLT currently also has the lowest debt to equity ratio of 0.34x. As FSLT has a target long-term debt-to-equity ratio of 1x, we expect future acquisitions to continue to be highly accretive as they can be funded by lower cost debt. We maintain our BUY recommendation on FSLT and maintain our target price of US$1.22 (S$1.76).