Rickmers confounds investors on DPU

THE difference between distributable income and distribution per unit (DPU) became sharply obvious to investors when Rickmers Maritime Trust (RMT) became the last of the three SGX-listed shipping trusts to release second-quarter results at the end of last week.

RMT said back in May that it expected to see an increase in distributable income in Q2 due to the delivery of new vessels. It delivered on that, posting a 42 per cent rise in distributable income to US$19.6 million. Charter revenue and cash flow from operating activities both rose 59 per cent and 56 per cent respectively to US$37.6 million and US$28.7 million from the second quarter the year before.

However, the rub lies in the actual returns to unitholders in the form of distribution per unit – DPU plunged 73 per cent to just 0.6 of a US cent. Like the other two trusts reporting before it, RMT cited conserving cash as a reason for the cut. It also chose to use the results briefing to highlight some major challenges facing the trust’s management, while declining to give a DPU forecast for the coming quarters. In the process, RMT has positioned itself as the shipping trust with the most negative outlook.

Investors naturally reacted negatively on Monday, selling down the trust, which lost over 20 per cent to close at 46.5 cents from 58.5 cents on Friday.

To be fair, the issues that management flagged are not new. The refinancing of RMT’s US$130 million top-up loan facility maturing in April 2010 and unsecured funding for its four 13,100 TEU ships, due for delivery in the latter part of 2010 have been hanging over it for most of the year, as has the question of value-to-loan (VTL) covenants and the need to negotiate a waiver on them.

Analysts have also turned bearish on RMT. Maintaining its ‘sell’ call on RMT, Citigroup’s Rigan Wong said DPU was lower than consensus expectations of 1.5 US cents and went on to add that: ‘We believe RMT’s share price may de-rate, given the low Q209 DPU payout and lack of dividend guidance.’

The question that needs to be asked is why did they choose to reiterate them at this particular juncture. One answer might be that the prognosis has gotten worse and management feels investors should be further warned of the risks. ‘PwC highlighted the ‘existence of a material uncertainty that may cast significant doubt on the group’s ability to continue as a going concern’, noting that RMT’s US$130 million loan maturing in April 2010 has yet to be refinanced and that it is also in talks with banks on its VTL covenants,’ said Mr Wong.

The other possibility is that in depressing the unit price, it helps make the yield look a little better. The 5.9 per cent annualised yield at last Friday’s closing is far below the average 15 per cent yields the other two are producing, but with yesterday’s closing price of 45 cents, it goes up to 7.7 per cent. As the unit price drops, the yield picture might start to look better going forward because, barring some pretty drastic restructuring moves, the future looks very grim indeed for RMT. Barring questions of whether one buys business trusts for capital gains or dividend yields, this may well be the only bright spot ahead.

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.

Rickmers cuts Q2 DPU to US0.6cents to conserve cash

RICKMERS Maritime Trust (RMT), the last of the shipping trusts to report second-quarter results, has reported the biggest cut of all in distribution per unit (DPU) – a 73 per cent plunge to just 0.6 of a US cent. First Ship Lease Trust (FSLT) cut DPU to 2.45 US cents from 2.8 US cents previously while at Pacific Shipping Trust (PST), the drop was to 0.99 US cent from 1.09 US cents.

Both also held out the possibility of further cuts from the third quarter, FSLT to 1.5 US cents and PST to 70 per cent of distributable income from 90 per cent currently. RMT declined to give a DPU guidance for the remaining quarters. All three trusts cited cash conservation amid uncertain times as reasons to cut distribution. RMT, however, did continue to chalk up increases in charter revenue, operating cash flows as well as income available for distribution.

Q2 revenue rose 59 per cent to US$37.6 million from US$23.7 million for Q208 due to expansion in operating fleet to 16 vessels compared with 11 a year ago. For the first half, charter revenue rose by just over half to US$70.1 million compared to US$46 million for H108. Operating cash flow also rose 56 per cent to US$28.7 million for the second quarter and 58 per cent to US$55.9 million for the first half.

Fleet utilisation remained high at 99.8 per cent with only 5.5 off-hire days out of a total of 2,718 vessel ownership days.

Q2 income available for distribution was 42 per cent higher at US$19.6 million. However, net profit fell 43 per cent to US$5.2 million due to provision of US$7.5 million for asset impairment, which RMT provided for after taking into account the potential early re-delivery of the Maersk Djibouti in February and subsequent lower charter rate in 2010 given the current weak container shipping market.

Looking ahead, negotiating a waiver of value-to-loan (VTL) covenants and the refinancing of RMT’s US$130 million top-up loan facility maturing in April 2010 remain challenges, management warned. RMT also has the spectre of unsecured funding for its four 13,100 TEU ships, due for delivery in the latter part of 2010, hanging over it. Management is currently in discussions with various stakeholders to resolve the matter, RMT said, adding that a financial adviser and investment bankers have been appointed.