FSL – DBSV

A quarter of woes

At a Glance

• 2Q10 DPU down 37% q-o-q to 0.95 UScts as Trust deals with series of recent negative events

• No DPU guidance for 3Q; two product tankers trading on spot market impair income visibility

• Maintain Fully Valued call with revised TP of S$0.40

Comment on Results

The lower DPU payout follows premature re-delivery of two product tankers by customer Groda Shipping, consequent arrest of the vessels and loss of long-term charter-hire from the two vessels. Revenue of US$28.5m included the US$6m security deposit received from defaulting counterparty. Excluding that, revenue would have been down 8% q-o-q owing to the default. Trust expenses were higher as well by about US$3.5m due to one-off expenses. Moreover, given the termination of the long-term lease contracts, the Trust recognised a non-cash impairment loss of US$7.9m and registered an accounting loss of US$6.1m in 2Q10.

Outlook and Recommendation

The product tankers have since been released after FSL Trust put up guarantees amounting to a total of US$4.4m at the respective courts. Lawsuits are now ongoing under respective jurisdictions. Separately, FSL Trust has filed a writ in the Supreme Court of Singapore against Daxin and the bareboat charterers of the 2 vessels but it is unclear at this point what the outcome of theselegal actions will be, and whether FSL Trust will be able to recover the guarantee amounts. Meanwhile, the two product tankers will be deployed on the spot market, but current day rates are much lower than previous rates and utilisation could be volatile. The only positive in this set of results is the charter-free valuation of its fleet, which improved by about 10% q-o-q to US$686m. This implies a safe 156% LTV coverage at the end of waiver period in June 2011.

We raise FY10F DPU forecast by 7% to 4.2UScts to account for the slightly higher-than-expected DPU payout in 2Q10, but given the potential volatility in future cash flows and lack of DPU guidance, we maintain our Fully Valued call at a slightly higher TP of S$0.40 (15% target yield). We recommend a switch to Pacific Shipping Trust (BUY, TP US$0.37) for more stable distributions.