PST – DBS

DPU cut will add little value

• Plans to cut payout from current 90% to potentially 70% from 3Q09
• FY10 DPU forecast reduced by 20%
• Gearing, distribution policy already conservative
• We see limited strategic potential of this move, downgrade to FULLY VALUED, TP US$0.22

2Q09 results, payout in line. Pacific Shipping Trust’s 2Q09 results were in line with expectations and consistent with 1Q09 performance – with revenue of US$15.5m and net distributable cash of US$5.8m. The Trust paid out 90% of total cash generated (after debt repayment)- as per its practice in previous quarters – and DPU amounted to 0.99UScts per unit, compared to 0.98UScts in 1Q09 and 1.09UScts in 2Q08.

Rationale behind DPU cut is not clear. The Trustee Manager will be reviewing its distribution policy, with a view to reduce payout and conserve more cash from 3Q09. Management anticipates that payout for 3Q09 would not be lower than 70%. Given that PST is already the most conservative among the three shipping trusts in terms of distribution policy and gearing – distributable cash is only arrived at after accounting for debt repayment every quarter – we are not sure how the proposed DPU cut will add value. While management remains on the lookout for opportunistic acquisitions, the US$1.5-2m additional cash that can be saved per quarter does not look to be realistically significant for any transaction.

Looks expensive on FY10 basis. On other fronts, the discussions with troubled customer CSAV are still ongoing and we look for a ~30% charter rate cut at worst. Adding the impact of the cut in payout, we reduce our FY09 and FY10 DPU forecasts by 8% and 20%, respectively, and downgrade the stock to Fully Valued at a TP of US$0.22 (target yield of 12% on FY10 DPU). Having gained 72% YTD, the stock – trading at 10.7% FY10 yield – looks expensive compared to its peers.