FSL – DBS

Lower risk, higher returns

• Counterparty risks waning, no big refinancing risks before 2012
• Healthy uptake of units in distribution reinvestment scheme signals investor faith in management
• Valuations look more compelling than peers
• Upgrade to BUY, TP revised up to S$0.71

Risks look more manageable now. FSLT has a more diversified fleet than peers – with about 38% exposure to containers and 65% to tankers (oil, chemical, product). With the oil price in recovery mode, counterparty risk is reduced as well. Berlian Laju Tankers, one of its more vulnerable clients, should be able to tackle its balance sheet difficulties with recent bond and rights offerings. Moreover, FSLT has no big refinancing risks before 2012.

Conservative approach seems to be working. Though the sponsor and key management lent only about 9% support to the 1Q09 Distribution Re-investment Scheme (“DRS”), the uptake rate of 30.9% announced recently was surprisingly high – and seems to vindicate the management’s prudent approach to cash distributions. FSLT will now issue about 15.6m new shares and save US$3.8m in cash. With a dividend cut earlier and the DRS now, FSLT is looking to prepay borrowings and build a better negotiating platform with lenders, should the need arise.

DPU guidance inspires confidence. As such, given the lack of near-term concerns, we believe there is better visibility to FSLT’s dividend payouts, but it is still trading at yields of about 25% – higher than other shipping trusts. Management has also re-affirmed 2Q09 DPU guidance of 2.45UScts. This is despite the higher number of units, indicating that the DRS scheme may not be dilutive in the near-term. Hence, we upgrade the stock to BUY; and our DDM-based TP is revised up to S$0.71.