FSL – DBS

All set for a take off

• 4Q09 DPU payout of 1.50 UScts in line with expectations, maintains similar guidance for 1Q10
• Potential bond issue may be expensive, but will provide acquisition war chest in excess of US$100m
• Poised for re-rating, share price lagging the recovery in shipping stocks across the world
• Limited downside; maintain BUY; TP raised to S$0.78

No surprises in 4Q09. FSLT delivered another quarter of steady results. Revenue of US$24.5m was stable q-o-q, and the Trust generated cash of US$16.2m, 8% below US$17.6m in 3Q09, owing to the higher interest costs. Of this, the Trust will distribute US$9m to shareholders, or a DPU of 1.50UScts for 4Q09.

Bond issue still in the offing. FSLT had to can its earlier US$200m bond offering owing to the higher spreads in the wake of the Dubai debt crisis last year. However, management plans to go ahead with the same offering when market improves. Key concern for the bond is pricing. About half of the bond proceeds will be used to repay existing borrowings, which will help resolve the LTV covenants issue to a greater extent. The rest will build up to a US$130m war chest, together with US$30m from the share placement last year, to pursue DPU accretive acquisitions.

Laggard stock, poised for re-rating. With economic numbers improving and container freight rates on the rise, most container shipping stocks have seen a steady reversal in fortunes of late. Even the US-listed shipping trusts have risen 10-20% since the beginning of 2010, whereas FSLT has stayed largely flat, despite promising much better yields in excess of 13%. Thus, we re-iterate our BUY call at a revised TP of S$0.78 (pegged to 10% target yield). Even if we assume the whole US$200m bond is used to repay existing (cheaper) bank debt, with continuing loan amortization payments and no acquisitions, the worst outcome would be higher interest expenses of ~US$12m p.a, which would imply a FY10 DPU of ~5.0Scts, or a worst case yield of 8.3%.