Rickmers – OCBC

A Tale of Two Bets

Competitive distribution yield despite cash retention. Rickmers Maritime (RMT) is a listed shipping trust. Its shipping and distribution incomes are tax-exempt for all investors. RMT currently distributes 8.56 US cents annually. With its current price at S$1.06, or US$0.76, this translates to an attractive yield of 11.2%. In comparison, the Singapore 10-yr government bond yields 2.24%. RMT’s yield is also on par with the other shipping trusts listed on SGX, despite RMT retaining more than 25% of its cash income (net income + non-cash charges like depreciation) for capex. Note that non-USD investors would see their distributable income
subject to forex fluctuations.

Relatively lower asset yields. The shipping trusts’ vessels can be judged on their earning prowess – or their asset yield (annual lease income to acquisition cost of asset). We estimate that RMT’s vessels feature relatively lower asset yields, net of time charter expenses, versus the other listed peers.

Big plans for growth. RMT is growing at the fastest pace and magnitude of all the shipping trusts. RMT has already grown its portfolio from five vessels at its May 2007 IPO to ten by January this year. It is contracted to purchase another 13 ships over 2008-2010 for a total consideration of about US$1.35b. This will boost its fleet capacity by 3.2x, from 40,910 TEU currently to 131,560 TEU.

Leverage will spike. When RMT listed, it was entirely equity-funded. At 31 Dec 2007, its debt-to-equity ratio was 0.58x. To support its US$1.35b worth of acquisition plans, RMT would have to raise new equity eventually. However, the trust’s debt-to-equity could increase to 3x before the next tranche is raised. This is a double-bet, as RMT is focusing solely on the market for containerships, which is driven by the trade of manufactured goods.

Target price S$1.22. Our DCF value of the unitholders’ share in the trust is US$0.90 per unit. Based on OCBC Treasury’s view of a 1.35 SGD/USD exchange rate by end 2008, we set our target price at S$1.22, a 15% upside from the current price. Our valuation assumes the acquisition of another seven vessels for about US$500m over 2008-2012. With limited
clarity on RMT’s future distribution policy, we assume it continues to retain about 25-30% of its cash income. This still translates to high yields of 12.2% in FY08 (9.33 US cents DPU) and 14.4% in FY09 (11.01 US cents DPU). We are initiating coverage on RMT with a BUY rating.