Shipping Trusts – OCBC

Trust versus Trust

Attractive asset class as a whole. We have BUY ratings on all three shipping trusts – Rickmers Maritime (RMT), Pacific Shipping Trust (PST), and First Ship Lease Trust (FSLT). The asset class as a whole is very attractive – unitholders gain exposure to an attractive sector while sidestepping some of the inherent volatility of the industry thanks to long lease terms and cash flow visibility. The trusts’ shipping income is taxexempt and distributions are also tax-exempt for all investors. All three trusts offer attractive distribution yields of more than 10-12% and potential for DPU accretion.

Payout strategy and asset yields vary. We believe key performance criteria include: 1) asset yields and distribution pay-out strategy, and 2) growth plans and leverage. We estimate that PST’s vessels feature relatively higher asset yields versus the other listed peers. Meanwhile, FSLT is the only trust to distribute 100% of its cash income. Consequently, its DPU consists of a return on unitholders’ investment (net income) and a return of invested principal (depreciation). PST has pegged its debt repayment to its depreciation charge in an effort to preserve NAV. RMT is currently retaining more than 25% of its cash income, which it can utilize for capex. RMT’s future payout strategy has not been explicitly stated.

Big plans for growth. All three trusts plan to aggressively grow through DPU-accretive acquisitions, with RMT growing at the fastest pace and magnitude. PST and FSLT are targeting about US$200 and US$300m in acquisitions yearly. RMT is contracted to acquire US$1.35b worth of vessels over 2008-2010, once approval is finalized in an upcoming EGM. These growth plans are powered through leverage. By the end of this year, we believe the trusts’ debt-to-equity will range from over 1x to 2x. Business trusts have no gearing limit but we believe a sustainable debt-to-equity target is 1x because of the high volatility in vessel values. In our view, the trusts’ growth beyond 1-1.5x can only be sustained by further equity issues. Some of the trusts may have an option to postpone the next issue – for instance, RMT’s debt-to-equity might increase to 3x before the next tranche is raised – but the need for fresh equity is inevitable at this pace.

Our top pick is PST. The reengineering of PST’s debt model over 2008 presents a one-time opportunity of sharply increasing DPU through accretion from leverage and a higher payout strategy.

Source : OCBC Securities