PST – UOBKH

Assessing PIL’s Financial Health

Pacific International Lines (Private) Limited (PIL), the parent, sponsor and major customer of Pacific Shipping Trust (PST), owns and operates a fleet of 104 vessels with total capacity of 186,994 TEU. PIL accounted for 70-80% of PST’s 2Q09 revenue.

Strong balance sheet to weather the current shipping downturn. PIL has just filed its 2008 accounts with the Registrar of Companies. End-08 net gearing was at a reasonable level of 32%, but its quick ratio of 0.9x was a tad low. Interest coverage ratio was healthy at 6.2x. Net gearing could rise to 60% with future capex of US$469.2m for 2009-2011.

Increase in debt due to consolidation of PST. PIL’s total group borrowings increased by 36% yoy to US$1.1b in 2008 primarily due to the consolidation of PST’s debt (as of end-08, PST’s total loans were US$230m). Following PST’s 3-for-4 rights issue in Sep 08 with PIL subscribed for 90% of the rights shares, PST changed from a 34.6%-owned associated company to a 59.2%-owned subsidiary of PIL.

Asset value to term loans at 1.5x. Of PIL’s US$1.1b debt, 40% is due in 2009 and the balance 60% due in 2010-2018. PIL’s US$746.5m was collaterised with assets with a net book value of US$1.14b (1.5x of the loans).

Maintain BUY on PST with target price of US$0.37. We forecast PST’s 2009 and 2010 dividend yield of 12.4% and 9.9% respectively after adjusting for the reduction in distribution payout ratio from 90% to 70%. The cash retained will be used to fund acquisitions. Accretive vessel acquisitions will likely drive a rerating of the stock. Our earnings forecasts have not imputed such acquisitions.