FSL – OCBC

Manager offers a more positive outlook

Results in line. FSL Trust (FSLT) announced US$24.5m in 4Q09 revenue, down 4.6% YoY and 0.6% QoQ. The revenue decline was because of the Geden charters that are pegged to US$ LIBOR and re-set quarterly (this volatility is offset by the interest costs on the two vessels which are also floating). Net cash generated from operations of US$16.2m rose 0.8% YoY but fell 8.4% QoQ. The QoQ decline was due to higher interest margins as per the amended loan facilities which lowered loan-to-value covenant requirements from 145% to 100% for two years. FY09 revenue and cash earnings were  within 0-3% of our estimates.

4Q DPU of 1.5 US cents; 1Q guidance the same. DPU was flat QoQ but fell 51.3% YoY to 1.50 US cents because of a lower payout policy. The current payout represents 55.6% of net cash generated from operations versus 96.3% a year ago. FSLT is using the retained cash to repay roughly US$8m in loans per quarter. FSLT is guiding for a 1Q10 DPU of 1.50 US cents (flat QoQ, down 39% YoY), equivalent to an annualized yield of about 14%. The manager said it would continue to limit guidance to one quarter ahead until FSLT was “well and truly through” the crisis.

What next? The manager said it was “well advanced” to deploy the US$28.3m net proceeds from the Sep 09 placement towards acquisitions. FSLT re-iterated its focus on attaining asset yields of about 15% and unlevered IRR of 11-12%. The manager also said its minimum threshold for charterer credit health is BB- or equivalent. Note we don’t expect FSLT to gear up on the proceeds in the near-term.

Manager offers a more positive outlook. In Nov 09, FSLT had to postpone its senior unsecured notes offering but it said it is open to re-visiting the offering in coming months. While the cost of unsecured debt is likely to be significantly higher vis-à-vis the current facilities, it would benefit FSLT (in our view) by reducing the ratio of secured debt to collateral. The manager presented a fairly positive outlook of both the industry and its prospects in 2010. FSLT believes it has “moved past the point of highest counterparty default risk in this cycle”. It further guided that while 2009 was about “putting its house in order”, 2010 would be about slowly returning to a growth strategy. Maintain HOLD with S$0.53 fair value or 2.2% total return.