FSL – UOBKH

No surprises: 2Q08 DPU in line with expectations

First Ship Lease Trust (FSLT) has announced its 2QFY08 results. Charter income came in at US$20.7m, accounting for 24.3% of our forecasts, in line with expectations while cash available for distribution was US$14.0m, accounting for 25.0% of our full year forecasts. Distributions Per Unit (DPU) for 2QFY08 was 2.8 US cents, slightly better than managements’ latest guidance of 2.77US cents for the quarter.

Incentive Fee threshold crossed again: management electing for units. An incentive fee of US$239,000 was paid to the trustee-manager as the Distributable Cash Per Unit (DCPU) has exceeded the 115% benchmark quarterly DPU of 2.13 US cents. As in 1Q08, management has elected to receive 99.99% of the incentive fees in the form of new units. We calculate the dilution to be minimal with the impact to DPU being approximately 0.0007 US Cents per quarter.

Distributions expected to grow to 3.05 US cents per quarter, implying yield of 12.9%. FSLT took delivery of two 4,250TEU containers from Yang Ming Transport Corporation (YML) during 2Q08. These two vessels will fully contribute to FSLT’s charter income and DPU from 3Q08 and are expected to increase FSLT’s DPU to 3.05 US cents per quarter, implying an annualized yield of 13.0%.

Acquisition of third sister ship in Oct 08 could boost annualized yield to 13.4%. FSLT has a conditional agreement to acquire a third vessel similar to the first two from YML by end Oct 2008. FSLT is currently in discussion with its lenders to increase its revolving credit line from US$200m to US$265m, enabling FSLT to take delivery of the third vessel. While management has not guided on the accretion to DPU for the third vessel, we estimate that FSLT’s distribution could increase to 3.15 US cents/ quarter in FY09 assuming similar financing and charter terms are reached.

Stable and visible distributions: Maintain BUY. 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 years. The staggered redelivery of its diversified fleet of tankers, bulkers and containerships also helps to mitigate risks associated with the cyclical nature of shipping. With the completion of the acquisition of the second Yang Ming vessel, management is guiding for a DPU of 3.05 US cents per quarter from 3Q08 onwards, implying an annualized yield of 12.9%. We maintain our BUY recommendation on FSLT with a target price of US$1.24 (S$1.61) based on a yield based target of 9.0%.