PST – OCBC
Equity cash call, as expected
Equity cash call… Pacific Shipping Trust (PST) has announced a nonrenounceable preferential offering (PO) of 252.75m new units, on the basis of three new units for every four existing units. Pacific International Lines (PIL), PST’s sponsor and 34.64% unitholder, has agreed to subscribe for its pro-rated shares as well as any unsubscribed units. An EGM will be held on 27 August to obtain unitholders’ approval. The issue price of 36.5 US cents per new unit is at a 5.2% discount to Friday’s close of 38.5 US cents, and a 18.9% discount to PST’s IPO price of 45 US cents.
…as expected. We had repeatedly stated in our previous reports that an equity cash call was imminent as PST’s 2008 acquisitions and future acquisition plans (it has a soft target of US$200m in new vessel buys per year) stretched its leverage levels uncomfortably. PST estimates it will raise about US$92.3m in gross proceeds from the offering, which will be used to finance and refinance the four new vessels costing US$222.2m slated for acquisition in 2008: Kota Nabil (delivered in March); Kota Naga (delivered in May); CSAV Laja (expected mid-September); and CSAV Lauca (mid-November).
Expect more of the same. Fully debt-funded, the 2008 acquisitions would have bumped PST’s debt-to-equity up to 2.1x by year end; we are now projecting a debt-to-equity level of 0.9x at year end post the PO. We believe debt-to-equity beyond 1x is not sustainable in the long run – for one thing, debt repayment terms and schedules are more unfavorable as leverage increases. This current PO is part of PST’s ongoing debt-first-equity-later business model. If PST spends another US$200m in FY09 as per its acquisition target, we expect its debt-to-equity to again spike to roughly 1.7x by end 2009 – and bring it closer to its next equity injection.
Lowering fair value. We have revised our estimates to take the PO into account with our net profit estimates rising by 7-22% due to reduced interest expenses after the PO. The larger unit base (up 75%) more than offsets the decrease in interest expense, however, and our FY08F and FY09F DPU estimates1 fall 4-30% to 4.27 US cents and 3.87 US cents, implying distribution yields of 11.6% (FY08F) and 10.5% (FY09F). We are lowering our fair value estimate to US$0.41 from US$0.48 previously to take into account a higher cost of capital and a more uncertain industry outlook. Maintain BUY.
1 We assume a 90% payout is maintained