Rickmers – DBS

That sinking feeling

• 2Q09 DPU cut to 0.60UScts from 2.14UScts earlier – however usage of cash retained not specified.
• No indicative timeline yet on talks with bankers over bullet loan roll-over or covenant waivers
• Unfunded capex woes also persist; downgrade to SELL – target price reduced to S$0.40

DPU cut overshadows healthy operations. While we had highlighted the possibility of more DPU cuts from RMT in our earlier note, the quantum of the DPU cut – by 72% from 2.14UScts in 1Q09 to 0.60UScts in 2Q09 – took us by surprise. As did the fact that management did not provide any concrete guidance on the usage of the cash retained. Distributable income, however, surged 18% q-o-q to US$19.9m, riding on a 15% increase in revenue to US$37.5m. Net profit of US$5.2m was affected by US$7.5m provision on the Maersk Djibouti, which is up for redelivery in Feb-2010 and is currently lying idle.

String of woes still pending resolution. Like other shipping trusts, RMT is currently negotiating a waiver on its loan-to-value covenants. However, unlike peer FSLT (BUY, TP S$0.71), no indicative timeline for conclusion of talks has been provided. The more pressing worry for investors, though, is the refinancing of its US$130m bullet loan due in April’10 – which has been highlighted by the Trust’s auditors as a risk to its going concern assumptions.

Cash retention – how much is enough? While the Trust has resolved some immediate cash flow problems by deferring up to US$20m deposit payments due in 2H09 for the vessels on order, we believe it may even have to suspend distributions over a few quarters to resolve its refinancing woes – similar to what US-listed peer Danaos Corp has done since early’09. We believe this DPU cut and the perceived lack of clarity on negotiations with various stakeholders should weigh heavy on investors’ minds and downgrade the stock to SELL at a reduced TP of S$0.40 (FY09-10 DPU estimates cut by 54-60%). Downward pressure on share price will also make equity fundraising (which is inevitable if it honours its order commitments) more difficult.