FSL – DBS

Distributions in line

Comment on Results

First Ship Lease Trust declared its 2Q08 results today and announced a distribution of 2.80 UScts per unit for the quarter, which is in line with our expectations of 2.77 UScts per unit. The total distribution amounts to US$14.0m and represents 100% of distributable cashflows. The DPU payout for 2Q08 is 8 % higher qo-q and 28% higher y-o-y. Revenue for 2Q08 came in at US$20.7m, up 71% y-o-y.

The increase in revenue and net distributable income y-o-y is mainly due to the incremental cashflows from the acquisition and leaseback of six vessels – 2 product tankers with Groda in Nov’07, two crude oil tankers with Geden in Apr’08 and two containerships with Yang Ming Marine in May and Jun’08. A full quarter’s cash flow impact from the acquisition of the two Ying Mang ships is thus, expected to come into effect only from 3Q08 onwards. In addition, the third vessel to be acquired from Yang Ming, which is currently under construction and expected to be delivered by end October’2008, should bolster earnings from Nov’08 onwards. The Trust is currently negotiating an increase in its revolving credit facility by US$65m in order to facilitate the acquisition. Postacquisition, debt to equity ratio would stand at 1.2:1 (slightly higher than long term target of 1.16:1).

Recommendation

Thus, FSLT will continue to provide investors with steady distributions backed by accretive acquisitions and we maintain our DPU forecasts for 3Q08 and 4Q08 at 3.05 UScts and 3.07 UScts, respectively. Our DPU projection for the full year remains unchanged and we maintain our BUY recommendation at a target price of S$1.65, which is pegged to a target return of 9.4%. The stock is currently trading at a dividend yield of 12.8%-13.8% in FY08-09, which we believe translates to yield spreads that are unjustified when compared to US peers.