Month: April 2009
PST – DBS
And the renegotiations are here
Pacific Shipping Trust announced that it might have to renegotiate charter rates down by about 30% for CSAV, which charters 2 of its fleet of 12 vessels. To note, we had highlighted in our last report that the key risk for PST’s distributions would be in the form of counterparty risk with respect to CSAV. We estimate this will impact DPU by at least 13-15% in FY09 & FY10, and downgrade PST to FULLY VALUED at a reduced target price of US$0.15. Further risks stem from PST’s lenders invoking penalty clauses owing to the resulting material changes in charter contracts.
CSAV feels the heat. After a couple of downgrades by rating agencies earlier in April, Chilean container ship operator CSAV has decided to strengthen its balance sheet by US$750m – through a US$220m rights issue, as well as capitalising commitments with ship-owners and banks to the tune of US$400m. The re-negotiation with PST is thus, part of a broader co-operation and assistance framework to bail CSAV out of a difficult situation arising from huge operating losses.
And PST will be forced to cut DPU. Currently, CSAV’s two charters account for about 30% of PST’s revenue stream. Hence, we estimate revenue will be affected by about 10% in FY09-10, and lower our DPU estimates for FY09-10 by 14-16%. This translates to a DPU of about 3.2 UScts in FY09 and 3.4 UScts in FY10, down from 4.1 UScts in FY08.
Clouding sentiment for the shipping trust sector. While part of the reduction in charter hire may be capitalized in the form of shares to motivate ship owners, we feel the risks to DPU is heightened by reduced cash flows backing up the US$80m outstanding loan for the 2 CSAV ships. Diversion of cash flows to meet lender’s penal requirements cannot be ruled out. In line with lower DPUs, our DDM-based TP is also reduced to US$0.15. Downgrade to FULLY VALUED.
PST – OCBC
Charterer CSAV seeking rate reduction
Charterer CSAV seeking rate reduction. Pacific Shipping Trust’s (PST) customer CSAV is asking ship owners (such as PST) for a temporary reduction in charter hire payments. Two PST vessels (out of a 12 vessels fleet) are chartered to CSAV on 5-year time charters. These charters contribute 30% of PST’s annual revenue.
Expect PST will agree. We expect PST to agree to the renegotiation request. The reality is that accepting this reduction is probably the best option PST has in today’s environment. PST’s manager acknowledged that vessels of comparable size to the two PST vessels are currently unemployed and while the current market rate would cover operating costs, it would likely not be enough to cover both interest expenses and debt repayments. Lower cash flows from CSAV are better than no cash flows at all, in our view.
Still a lot of unknowns. Discussions are still in very preliminary stages. This is a complicated process as CSAV will have to negotiate reductions with all the numerous ship owners. Based on CSAV’s targeted savings, PST estimates that it may be asked for a 30% reduction in charter rates. This figure only holds if every owner agrees to similar terms (a big if). Typically, ship owners would demand some sort of compensation in return – revenue clawback or partial payment in CSAV equity – that has yet to be determined. Also unclear is how PST’s lenders will react to what likely qualifies as ‘material change’ in the trust’s circumstances. PST’s lenders could conceivably tack on a punitive spread to PST’s cost of debt (increasing interest expense) or demand higher debt repayments.
Will PIL follow suit? PST derives the remaining 70% of its annual revenue (on original rates) from bareboat charters to its sponsor and 59.2% stakeholder, Pacific International Lines (PIL). PST said it has not received any indications from PIL regarding rate reductions. Despite their strong ties, a request for renegotiation is not unlikely, especially if the container industry’s performance continues to deteriorate.
Maintain HOLD. We have reduced our revenue forecasts for FY09-10F by 7% and 9%, and slashed DPU estimates by 17% and 22%. We may need to make further revisions as more details emerge. Counterparty risk (and lender reaction) remains the key risk, and we think this is reflected in our US$0.16 fair value estimate. PST will release 1Q09 results next week. PST already has a fairly conservative distribution payout policy but the Board may have to be even more prudent in light of recent events.
ART – OCBC
Long term growth, albeit with near-term volatility
Part of a strong franchise. We are re-initiating coverage on Ascott Residence Trust (ART). ART owns a portfolio of serviced residence and rental housing properties in the pan-Asian region. The REIT’s properties are managed by The Ascott Group (Ascott), the serviced residence arm of 47.2% stakeholder CapitaLand. Ascott is the world’s largest international serviced residence owner-operator and has a 25-year industry track record. Its serviced residence brands enjoy world-wide recognition and strong award-winning reputations. ART’s highly diversified portfolio spans 11 cities in seven countries with no country contributing more than 25% of total FY08 revenue. ART trades at one of the highest forward yields within the S-REIT sector. It is also trading at a 68% discount to last reported NAV.
Near-term yield volatility. RevPAU is the key metric driving ART’s earnings and distributions performance. 4Q08 RevPAU showed the first impact of global economic events. ART’s China properties saw a 43% drop in 4Q RevPAU to S$127, as rates and occupancy fell post-Olympics. ART’s Singapore properties saw a 12% decline in 4Q08 RevPAU to S$230. We expect RevPAU to remain volatile (and on a downtrend) with demand for corporate travel impacted by the current macroeconomic turmoil. We are estimating DPU of 6.6 S cents for FY09F (down 24% YoY) and 6.2 S cents for FY10F (down 7% YoY). These figures are roughly 6-7% below consensus.
A viable investment option. While we agree that yields will decline in FY09-10F, ART’s current valuation seems to be pricing in a perpetual bear case. In our view, current share prices reflect a belief that business conditions deteriorate to a certain extent and then stay that way. The investment question then breaks down into two components: 1) A volatile (but still comfortable) yield over the next two years, and 2) A very low “floor” valuation that leaves ample room on the upside. We believe ART is a viable investment option for investors who can accept the near-term yield volatility and judge ART on the basis of its long-term prospects (which we think are sound).
Re-initiating with BUY rating. Our SOTP value of the trust is S$0.76. This incorporates our assumption of an equity issue of S$160m at the S$0.45 price level. Our fair value estimate for ART is S$0.57, at a 25% discount to our SOTP value. Key risks to our estimates include a worsethan- expected deterioration in the economic outlook in ART’s operating markets, a larger-than-expected cash call or more-than-expected dilution, and higher debt costs.
CMT – OCBC
Less attractive risk-reward proposition
Flat QoQ revenue growth in 1Q09. For 1Q09, CapitaMall Trust (CMT) reported gross revenue growth of 11.1% YoY or flat QoQ to S$134.5m. Net property income increased by a smaller 9.1% YoY and 7.5% QoQ to S$92.4m due to higher operating expenses from the acquisition of The Atrium and the opening of the Sembawang Shopping Centre. Unrealised forex loss of S$11.4m was recognized on the translation difference of syndicated loan but had no impact on cashflow. Reported balance sheet had not taken into account the Rights issue and the post-Rights issue balance sheet is likely to have a net gearing ratio of 29.2%.
Expecting further downside in retail rents. Conditions in the retail scene deteriorated further in 1Q09. Within CMT’s portfolio, only tenants in trade sectors such as supermarket, books & stationery, department stores and beauty and health related sectors experienced increase in consumer spending. Some of the trade sectors that have been perceived defensive and performed well in 4Q08, such as food & beverages sectors experienced turnover decline in 1Q09. With the recent downgrade of Singapore 2009 GDP growth to -6% to -9%, we are seeing increasing risk of further deterioration in consumer spending in the coming quarters. Declining turnover would translate to higher occupancy costs for tenants and this raises more doubt over the sustainability of high rental rates going forward. As such, we are now forecasting rent decline of -10% (from -5%) for CMT’s retail portfolio.
Downgrade to HOLD. Our revised DPU estimates have been lowered to 9 S-cents for FY09 (previously 9.1 S-cents) and 9.3 S-cents for FY10 (previously 9.4 S-cents). Risk-reward proposition may not look as attractive as before, with the worsening outlook and the recent increase in share price. Nevertheless, CMT has already locked in 90% of FY08 gross revenue (~S$460m) for FY09 and this will provide strong DPU visibility for FY09. Our fair value estimate has now been lowered to S$1.21 (previously S$1.26). CMT is now trading at our estimated FY09 DPU yield of 7% and for 1Q09, it will be distributing 1.97 S-cents to unitholders (annualized yield: 6.2%). While CMT has retained S$3.3m of taxable income (exclude CRCT distribution) in 1Q09, it is still committed to pay out 100% of its taxable income to unitholders for FY09. For now, we see limited share price upside and with no near term catalyst in sight, we are downgrading CMT to HOLD.
PST – BT
Pacific Shipping charterer planning capital boost
PACIFIC Shipping Trust (PST) yesterday took the initiative to give an update on developments at one of its charterers, major Latin American line Compania Sud Americana de Vapores (CSAV), which earlier this week said it was in discussions to strengthen its financial position by about US$750 million.
CSAV, which charters two of PST’s 12 vessels, on Monday said that as part of a financial strengthening plan, it recently appointed HSH Corporate Finance to oversee a restructuring plan to strengthen its operating cash flow and consolidate its South American franchise.
Among CSAV’s plans to boost capital is the decision to significantly increase its equity base. Thus, next to the capital increase of US$130 million currently being implemented, the company will ask its shareholders for an additional equity increase of US$220 million. Ship owners have also been asked to contribute US$400 million to the equity base of the company.
The plan seems to have found positive reception among investors with CSAV’s shares rising earlier this week.
Details of the proposal are being worked out. The company is asking charterers for a temporary reduction of charter hire payments of about 30 per cent, part of which will be capitalised.
PST chief executive Alvin Cheng, however, clarified that participation in the scheme is on a voluntary basis and the trust has not received further details about what is expected of it. ‘We feel very positive that CSAV has undertaken this exercise to improve its cash position,’ he said.
While Mr Cheng conceded that there may be revenue reduction with some effects on distribution per unit, he maintained that PST would not be too adversely affected. He added that it is difficult to give guidance on what the impact will be until further discussions with CSAV.
‘Despite the potential revenue reduction, PST’s business model and fundamentals remain sound and stable. Our cash conservation strategy thus far will provide us with sufficient headroom to meet our current financial obligations. We will provide our unitholders with updates on CSAV’s restructuring plan as and when the details are confirmed,’ said Mr Cheng.
PST shares closed unchanged at 17 US cents yesterday.