FSL – UOBKH

New Acquisitions Boost Distribution Yield To 14.8%

First Ship Lease Trust (FSLT) 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 FSLT 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 FSLT’s distribution per unit (DPU), raising DPU 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).

No guidance on third vessel as funding not secured. While FSLT has not provided guidance on the DPU accretion for the third vessel as financing has yet to be secured (US$60m required), we estimate the potential accretion at 0.07 US cents per quarter from 1Q09 onwards (assuming similar debt financing and charter terms as the first two vessels). We have assumed similar charter terms for the third vessel and have factored the acquisition into our earnings calculations. However, until the financing terms are clear, we are not factoring additional accretion to DPU from the third vessel into our forecasts.

The paradox: Rising DPU but falling EPU. We continue to like FSLT for its stable and visible distributions that are supported by its long bareboat charters that have an average remaining lease term of 9.2 years. FSLT offers investors an interesting paradox due to its aggressive depreciation policy that depreciates its assets at 5-7% p.a. As such, while this latest acquisition is DPU accretive, EPU has plunged as earnings after interest for these vessels are less than the associated depreciation (2008: -65.6%, 2009: -93.3%, 2010: -93.3%). However, we remind investors 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).