FSL – DBS

Positioning for growth

• Placement to raise proceeds of about US$29m, comes on the heels of successful negotiation of two year covenant waiver on existing borrowings
• 3Q09 DPU guidance of 1.50UScts maintained, dilution thereafter, if any, limited to 7% at worst
• DPU accretive acquisitions could be on the radar, maintain BUY with target price S$0.70

Placement fortifies balance sheet… FSL Trust has successfully placed out 80m new units at an issue price of S$0.525 per unit, raising S$41m (US$29m) in net proceeds. This latest development follows an earlier DPU cut and a recent two-year waiver on its loan-to-value covenants; and puts the Trust firmly on the road towards a less aggressive and more sustainable business model.

…and adds acquisition angle. Apart from reducing gearing and satisfying the more stringent covenant requirements on the Trust’s minimum equity level following the recent waiver negotiations, the placement provides a growth option to demonstrate the continued viability of the business model. The proceeds should enable the Trust to enter up to 2 small sized sale and leaseback deals and amidst the current shipping downturn, the Trust is looking at opportunistic deals promising more than 15% asset yield.

Manager keeps guidance intact. While 3Q09 DPU guidance has been reconfirmed at 1.50UScts, we believe that the Trust should be able to distribute a minimum of 1.40UScts on the expanded share base, going forward, without accounting for acquisitions. This implies a mere 7% dilution and brings FY10 yield down to 13.1% from 14.0% pre-placement, which is still attractive given the embedded growth option. Acquisitions, even at a conservative 12% asset yield, could potentially boost DPU by another 9% in FY10. Thus, we maintain BUY, TP slightly reduced to S$0.70 owing to near term dilution effects.