FSL – DBSV

Cash generation continues to disappoint

At a Glance

• 4Q10 DPU maintained at 0.95Uscts as expected, despite further decline in net cash generated from operations.

• Contribution from spot charter of product tankers remains tepid; organic DPU growth unlikely in FY11.

• Placement proceeds of ~US$28m raised in FY09 not utilized yet, visibility on acquisitions remains low.

• Maintain HOLD with TP of S$0.45

Comment on Results

4Q10 revenue of US$24.1m was up 3% q-o-q but operating profit was down 19% q-o-q, owing to lower bareboat equivalent rentals received from the product tankers as well as drydocking costs for one of them. As a result, net operating cash was down 8% q-o-q and 20% y-o-y to US$13.0m. While payout was maintained at 0.95 UScts for the quarter, the Trust had to draw down US$0.7m working capital to distribute the US$5.7m to unitholders, after the usual quarterly loan repayment of US$8m.

Outlook and Recommendation

The product tankers continue to be deployed in the spot voyage markets, but utilization rates and net bareboat equivalent income remain below expectations. While freight income was higher q-o-q in 4Q10, expenses were higher as well and the 2 tankers generated bareboat charter equivalent revenue of only US$0.2m in 4Q10, compared to the US$3.8m revenue per quarter applicable during the original charter. With tanker rates unlikely to perform in the near term, we choose to remain conservative on our earnings assumptions from these vessels in FY11.

While the Trust did not provide an update on fleet valuation of US$700m as at end-3Q10, a big change is unlikely. This puts the current value-to-loan ratio at 154%, and implies about 160% coverage at the end of waiver period in June 2011, above the requirement of 145%. We expect DPU payouts to remain at current level in the near term and given that we have not yet seen any acquisition funded by the US$28m placement proceeds raised in FY09, we maintain our HOLD call at an unchanged TP of S$0.45.