FSL – UOBKH
New acquisitions boost distribution yield to 14.8%
First Ship Lease Trust (FSLT) has announced that it has entered into a conditional agreement to acquire three 4,250 TEU container vessels from a wholly owned subsidiary of Taiwan based Yang Ming Marine Transport Corporation (YML) for a consideration of US$210m. The three vessels are scheduled for delivery to FSL Trust by end May, end June and end October this year. The vessels will concurrently be leased back to YML on a fixed basis for 12 years.
Acquisitions significantly boost DPU. FSLT has guided that the acquisition of the initial two vessels will be significantly accretive to FSL Trust’s distribution per unit (DPU) and projects that the acquisition will increase the distribution for 2Q08 to 2.77 US cents (from 2.05 US cents) and from 3Q08 onwards to 3.05 US cents (from 2.87 US cents). This translates into a FY09 yield of 14.8%.
Vessel acquisition price fairly attractive given recent transactions. Other recent market purchases for 4,250 TEU vessels also average in the US$73m to US$77m range. As such, the average acquisition price of US$70m per for these new acquisitions seems fairly attractive. Based on management’s DPU guidance, we estimate the bareboat charter rates for these vessels to be slightly less than US$20,000/ day, fairly reasonable given current market rates.
No guidance on third vessel as funding not secured. While FSLT has not provided guidance on the DPU accretion for the third vessel at this time as financing has yet to be secured (US$60m required), we estimate the potential accretion to be in the region of 0.07 US cents per quarter from 1QFY09 onwards, translating into a yield of 15.1% (assuming similar debt financing and similar charter terms as the first two vessels). However, as the acquisition of this third vessel is conditional upon FSL Trust securing financing, we have not factored potential earnings and DPU accretion for this vessel into our forecasts and target price as yet.
The paradox: Rising DPU but falling EPU. We continue to like FSLT for its stable and visible distributions which are supported by its long bareboat charters which have an average remaining lease term of approximately 9.2 years. FSLT offers investors an interesting paradox due to its aggressive depreciation policy which depreciates its assets at between 5-7% per year. As such, while this latest acquisition is DPU accretive, EPU has declined sharply as earnings after interest for these vessels is less than the associated depreciation (FY08: -44%, FY09: -87%, FY10: -87%). However, we remind investors that distribution yield should be the focus for FSLT and maintain our BUY recommendation on FSLT with a target price of US$1.24 (S$1.61).