Month: June 2009
Shipping Trusts – UOBKH
Valuation Methodology Switched From DCF To P/B
Valuation method changed to P/B. We switch valuation methodology for the three Singapore-listed shipping trusts, namely First Ship Lease Trust (FSLT), Pacific Shipping Trust (PST) and Rickmers Maritime (RMT), from discounted cash flow to P/B, which is the common method for valuing shipping stocks.
Fair prices raised, but recommendations unchanged. We believe the P/B methodology will be more reflective of and responsive to the changing risk profile of the shipping trusts, as financing risks are reduced as and when the shipping trusts overcome their balance sheet hurdles on the back of easing of credit and a recovery in ship prices. The shipping sector (as proxied by container shipping stocks) typically trades at 0.5x P/B at a cyclical trough and 2.5-3.0x at a cyclical peak.
FSLT. We raise our fair price for FSLT from S$0.50 to S$0.64 based on 0.8x 2010 P/B of the container shipping sector because FSLT’s net gearing of 138% is quite comparable with the sector’s gearing of 143%. FSLT remains a HOLD.
RMT. We also increase RMT’s fair price from S$0.44 to S$0.76 based on a lower 2010 P/B of 0.4x, a shade below US peer Danaos’ P/B of 0.5x, because RMT would have a similarly very high net gearing of 4.0x assuming debt financing for the US$700m capex due in 2010 relating to the purchase of four containerships to be chartered to Maersk. While our fair price for RMT is 24% above its current share price, we maintain our HOLD call in view of its unfunded US$700m capex due in 2010. We see a re-rating in RMT should it manage to resolve this financing hurdle.
PST. Unlike the other two shipping trusts, PST has no loan-to-value covenants with its bankers. Its net gearing ratio of 1.0x is the lowest among the three trusts. We reiterate BUY on PST with a revised target price of US$0.37 (previously US$0.22) based on 2010 P/B of 0.9x, higher than the P/B ascribed to the other two shipping trusts given its stronger financial position.
Shipping Trusts – DBS
Concerns easing selectively
• Stability in container shipping rates should spark renewed interest in shipping trusts
• FSLT – given that it has no imminent refinancing or counterparty issues – is best positioned
• German ship-owners rescue CSAV, PST may breathe easier
• Too many uncertainties still for Rickmers
Liner companies looking to push rate hikes. Most of the leading container carriers, including Maersk and NOL are now looking to arrest the free fall in container freight rates through coordinated rate increases. While the problem of lower trade volumes, idle capacity and a huge orderbook will still need some solving, we may be seeing some stability in rates for the rest of 2009. This, combined with the improving sentiment about a global economic recovery in 2H09, should spur renewed confidence in container shipping stocks, and consequently, shipping trusts.
Visibility improving bit by bit. FSLT has a more diversified fleet than peers – with about 38% exposure to containers and 65% to tankers (oil, chemical, product). With the oil price in recovery mode, counterparty risk may be reduced. Moreover, FSLT has no big refinancing risks before 2012. Elsewhere, with the US$360m lifeline thrown to CSAV by German owners last week, PST’s fortunes may be looking up as well. However, RMT has to contend with unfunded capital commitments and an upcoming bullet loan repayment in FY10 and the picture still looks hazy.
FSLT is our top pick, upgrade to BUY. Given the healthy response to the 1Q09 dividend re-investment scheme, investors seem to be giving the thumbs up to FSLT’s attempt to align the interests of both short-term and long-term investors. As such, given the lack of nearterm concerns, we believe there is better visibility to FSLT’s dividend payouts, despite trading at much higher yields of about 25%. Hence, we upgrade the stock to BUY, and our DDM-based TP is revised up to S$0.71.
Upgrade PST to HOLD. We are also upgrading our call on PST to HOLD with a revised TP of US$0.20, given that the worst that can happen now on its CSAV charters is a 35% rate cut. Elsewhere, we maintain our HOLD rating on RMT with a revised DDM-based TP of S$0.50.
FSL – DBS
Lower risk, higher returns
• Counterparty risks waning, no big refinancing risks before 2012
• Healthy uptake of units in distribution reinvestment scheme signals investor faith in management
• Valuations look more compelling than peers
• Upgrade to BUY, TP revised up to S$0.71
Risks look more manageable now. FSLT has a more diversified fleet than peers – with about 38% exposure to containers and 65% to tankers (oil, chemical, product). With the oil price in recovery mode, counterparty risk is reduced as well. Berlian Laju Tankers, one of its more vulnerable clients, should be able to tackle its balance sheet difficulties with recent bond and rights offerings. Moreover, FSLT has no big refinancing risks before 2012.
Conservative approach seems to be working. Though the sponsor and key management lent only about 9% support to the 1Q09 Distribution Re-investment Scheme (“DRS”), the uptake rate of 30.9% announced recently was surprisingly high – and seems to vindicate the management’s prudent approach to cash distributions. FSLT will now issue about 15.6m new shares and save US$3.8m in cash. With a dividend cut earlier and the DRS now, FSLT is looking to prepay borrowings and build a better negotiating platform with lenders, should the need arise.
DPU guidance inspires confidence. As such, given the lack of near-term concerns, we believe there is better visibility to FSLT’s dividend payouts, but it is still trading at yields of about 25% – higher than other shipping trusts. Management has also re-affirmed 2Q09 DPU guidance of 2.45UScts. This is despite the higher number of units, indicating that the DRS scheme may not be dilutive in the near-term. Hence, we upgrade the stock to BUY; and our DDM-based TP is revised up to S$0.71.
CMT – CIMB
Flat yields
• Islandwide retail occupancy down marginally. Occupancy of islandwide retail space at 93.4% was down marginally from 93.8% in 4Q08. Retail occupancy in the Orchard and Outside Central areas stayed above islandwide levels.
• Checking out the competition. We visited three of CMT’s competitors recently and conclude that CMT’s malls should be able to stay resilient despite the competition.
• Upgrading our estimates. We are now more positive that the healthy business in CMT’s suburban malls will provide support to rental levels. We change our rent assumptions for most of CMT’s malls to moderate growth of 3-5% for 2010-11, from declines of 5-10%. We also adjust for the number of units in 2009 after the rights issue. Our 2009 DPU estimate drops by 8% while our 2010-11 estimates rise by 12- 25%. Following our changes, our new DDM-derived target price is S$1.26, up from S$0.87 (unchanged discount rate of 9.7%)
• But maintain Underperform. Compared with its peers in the SREIT space, CMT appears fairly expensive at 0.86x P/BV and yields of 6% vs. the sector average of 10.2%. Since its last low of S$1.16 on 28 April, CMT’s share price has appreciated 23.3%. This would be an opportune time to exit a stock with flat yields and a lack of catalysts in the medium term. Maintain Underperform.
KREIT – UOBKH
Lower Gearing, Higher Upside
We visited K-REIT Asia (K-REIT) and key highlights from the meeting are as follows:
Credit crunch has abated. Availability of funding via bank loans has improved significantly. There is a slight improvement in the credit spread that banks charge, although the quantum is not obvious in management’s opinion. Management sees an advantage in the longer tenures of 5-7 years provided by commercial mortgage-backed securities (CMBS). Cost of borrowings for long-dated CMBS is not as prohibitive, compared with bank loans, as the yield curve is not as steep. K-REIT has a S$190m CMBS that matures in May 2011.
Conservative in valuing assets. K-REIT revalues its investment properties once a year and the next valuation will be conducted in Dec 09. The company has been conservative in valuing its assets and usually marks prices to the lower end of the market range. It values Prudential Tower at S$2,066psf, Keppel & GE Towers at S$1,347psf, Bugis Junction Towers at S$1,265psf and One Raffles Quay at S$2,213psf. The risk of severe markdowns in asset values is quite low, especially given the recent rebound in transaction prices for strata office space.
K-REIT has the lowest gearing of 27.6% among office REITs (CapitaCommercial Trust: 30.7% post-rights issue, Suntec REIT: 34.4%). Financial risk is low as the next refinancing is an unsecured floating rate loan of S$391m from Keppel Corporation due Mar 2011. Maintain BUY with target price at S$1.16, based on a dividend discount model (required rate of return: 7.7%, growth: 2.5%).