PST – OCBC

Lowers DPU payout; no forward guidance

Payout down to 70%. Pacific Shipping Trust (PST) posted a 39% YoY increase in gross revenue to US$15.6m and a 30% YoY increase in distributed income to US$4.8m. The gains were due to contributions from the two CSAV vessels acquired in 2008. On a QoQ basis, revenue rose 1.1% and distributed income fell 17.4%. The trust will pay out 0.818 US cents per unit to investors. This is equivalent to 70% of income available for distribution (2Q: 88%) or 43% of cash earnings (2Q: 48%). PST outperformed our estimates for the quarter as we had already priced in rate concessions to charterer CSAV. But these discussions, which began in April, are still ongoing.

No forward DPU guidance. The Board did not give any forward guidance for DPU payout in 4Q09. The manager said it was not customary for PST to provide guidance, and last quarter’s guidance for 3Q09 was only given because of the sudden drop in payout from 90% to 70%. PST is describing the increased retention as a move to “equip [it] with the financial flexibility to seize value-accretive opportunities” in the next 12 to 18 months. Potential targets include the offshore or chemical tanker asset class. At the briefing, the manager said the Board will continue to review the necessity to retain cash based on market conditions and available opportunities. Our take of these actions is a little different: the shipping sector is still in fairly rough shape, and negotiations with CSAV continue. The increased retention, in our view, is PST’s attempt to build up a defensive war chest in case a negative outcome results. In fact, we don’t believe PST is in any position to consider acquisitions until it can resolve the CSAV issue.

Revising earnings estimates. We had previously assumed a 30% rate cut on the two CSAV vessels in effect from 3Q09. We are now stripping out this assumption in view of the uncertain quantum and timing of any rate concession. This does not mean we believe any action is less likely or less significant – if PST agrees to a renegotiation, it could open the floodgates. Its other charterer, sponsor Pacific International Lines, would be justified in also asking for concessions. We now price in the renegotiation risk in our valuation: valuing PST at a 30% discount to our discounted FCFE value for the trust (prev: 20%). We also assume the
70% payout level continues. Maintain HOLD with revised US$0.26 fair value (prev: US$0.27).