Shipping Trusts – OCBC

3Q09 results recap

Results recap. All three shipping trusts reported 3Q results recently. FSL Trust (FSLT) results were in line with our expectations while Rickmers Maritime (RMT)’s were below as the trust did not accept delivery of the latest Hanjin newbuild vessel, which the sponsor will hold on to, while talks continue on challenges regarding the trust’s large debt load; a maturing loan facility; and a large committed order book. Pacific Shipping Trust (PST) results were above our estimates as we had factored in charter rate cuts to CSAV but negotiations on that front have yet to be resolved. All three trusts reported that their charterers have been making charter  payments on time so far.

DPU visibility is limited. Only FSLT has given DPU guidance for 4Q09 (1.50 US cents, flat QoQ). In our opinion, the other two trusts are not in a position to give much forward guidance because of ongoing issues. In fact, we believe FSLT has relatively the most visibility on 12 months forward DPU. Counterparty risk – the risk of a charterer defaulting or renegotiation charter terms – remains the major concern for the sector and consequently a major threat to DPU. Still, FSLT has addressed the most immediate threat to distributions by securing loan-to-value (LTV) covenant waivers.  On the other hand, the CSAV renegotiation continues to be an overhang on PST. Rate concessions would impact cash flows and potentially give just cause to its other charterer (its sponsor) for demanding similar concessions. Meanwhile, we believe it is more prudent to not expect further distributions from RMT, the most at-risk trust in our view, while negotiations with lenders and its sponsor continue to be unresolved.

Prefer FSLT. We maintain our UNDERWEIGHT rating on the sector. We believe the tide has yet to turn for the container industry, and believe investors should limit their exposure to leveraged asset owners in this space. FSLT [BUY, FV: S$0.72] is our preferred play for the shipping trust sector as it has addressed many of our concerns regarding its balance sheet and previously aggressive payout policy. We also like its diversified portfolio and the relative visibility of its yield. Proceeds from its recent placement have been earmarked for acquisitions, which could be made in the coming months. On the other extreme, we have a SELL rating on RMT [FV: S$0.16] driven by the complex challenges faced by the trust. In our opinion, a resolution here is: uncertain; likely to be time-consuming; and perhaps significantly dilutive to unitholders.