FSL – DBSV

Unexpected counterparty issues

• Key customer Groda Shipping reneges on contract, returns product tankers prematurely to cut losses

• Worst case, DPU down 15-18% in FY10-11

• Risk of knock-on effect on other customers, despite the presence of corporate guarantees as recourse

• Downgrade to HOLD, TP reduced to S$0.55

Charterer wants to return 2 vessels prematurely. FSLT has been requested to take immediate re-delivery of two of their vessels by charterer Groda Shipping, much before the scheduled charter expiry of November 2014. The two vessels are product tankers of about 47,000 dwt each and are currently on a back-to-back sub-charter to Russian statecontrolled energy company OJSC Rosneft, under a long-term Contract of Affreightment (“COA”). Utilisation by Rosneft was probably low and high bunker prices rendered the arrangement unsustainable for Groda. FSLT is likely to settle amicably and will receive US$3m security deposit on each vessel, which translates to about 5 months charter-hire.

Impact cash flow significantly. The two charters are currently fixed at US$20,700 per day each and contribute about 15% to FSLT’s topline. The ships are still employed by Rosneft and FSLT could go into a direct contract with them. However, the COA revenue should be significantly lower than the current bareboat charter rate, and FSLT would have to assume operating risks as well. The other option for FSLT is to scout for 3rd party employment, but current charter rates could be around 40% lower than the existing bareboat rate.

Quarterly DPU could fall to 1.1UScts from 1.5UScts in the near term. Assuming a conservative 50% cut in income from the Groda vessels, our DPU estimate for FY10-11 is reduced by 15-18% to 4.8-5.3UScts from 5.6-6.5UScts earlier. Pending further clarity on negotiations with Groda and how the trustee manager employs the ships in future, we downgrade the stock to HOLD at a TP of S$0.55 (higher peg of 12% target yield to reflect increased risk of charter renegotiations by customers). Impact on DPU could be lower if part of the U$6m security is channeled into distributions.