FSL – UOBKH

Yields Are Intact But Bullet Payments Not Too Far Away

First Ship lease Trust (FSLT) has raised S$42.0m (US$29.2m) via a private placement of 80m new units (15% of pre-placement share capital) at an issue price of S$0.525/share to fund acquisitions. The shipping trust has also secured a two-year waiver for its loan-to-value (LTV) covenant and reaffirms quarterly
payout of 1.5 US cents from 3Q09 onwards.

Management targets gross asset yield of 15 p.a. Based on the placement price of S$0.525/share, we estimate the cost of equity at 16.5%, which appears high. However, the management targets a gross asset yield of 15% p.a. While it is difficult to estimate the effect of FSLT’s proposed vessel acquisitions, shipping trusts generally do not undertake acquisitions that are non-accretive.

Waiver of LTV covenant is a positive development for FSLT as it eliminates the risk of breaching its LTV covenant, given the fall in ship values. Over the two-year waiver period, FSLT will make quarterly repayment of US$8.0m.

However, balloon payments are not too far away. While FSLT has begun to repay part of its loans on a quarterly basis, it still has a total outstanding loan balance of about US$400m due for balloon payments in 2012 and 2014. It will either have to refinance the debt or raise equity for the bullet payments. The latter would likely result in a yield dilution. Based on a hypothetical scenario, if FSLT were to raise US$400m at today’s share price of S$0.61, this would imply a mere yield of 5.6% p.a. (before accretive acquisitions).

Maintain HOLD and cut our fair price from S$0.64 to S$0.62 in view of the dilution from an enlarged share capital. Our fair price is based on 0.8x 2010 P/B of the container shipping sector. We suggest entry price at S$0.56.