FSL – DBSV

Buy for yield and underlying recovery

At a Glance

• Predictable results again; declares DPU of 1.50UScts for 1Q10, maintains similar guidance for 2Q10

• Provides “charter-free” vessel valuation of US$623m – 24% discount to NBV but well within covenant limits

• Share price re-rating still lagging those of ship operators

• Maintain BUY with TP S$0.78

Comment on Results

There was again no surprise in 1Q10 as far as operational results were concerned. Revenue came in at US$24.4m, stable q-o-q, and the Trust generated net cash of US$16.3m from operations, in line with our estimates. As guided previously, the Trust paid out 1.50UScts as distribution for 1Q10, though they had to depend slightly on cash retained in previous periods to meet the guidance. As in previous quarters, US$8m was earmarked to prepay loans, which should bring outstanding loans to US$477m in April 2010.

Outlook and Recommendation

The Trust also took the opportunity to announce the independent charter-free valuations of its 23 vessel-fleet, which stood at US$623m as of March 2010. This is about 6% higher than a similar valuation of US$590m obtained in October 2009, pointing to a gradual recovery in asset values in line with demand recovery. The “charter-free” valuation, while not fully relevant to FSLT’s business model, represents a 24% discount to the vessels’ NBV of US$821m.

The valuation also represents 129% of current indebtedness of US$484m, well within the revised LTV limit of 100%, which is applicable until 2Q11. Based on the expected indebtedness of US$440m at end-2Q11, the charter-free value required to fulfil the original 145% LTV covenant would be US$638m, or only about 2.5% higher than current valuations. Thus we would not be unduly worried at this stage about the chances of future technical defaults.

Hence, we are maintaining our BUY call on FSLT at a TP of S$0.78 (10% target yield), given the visibility in payouts, possibility of acquisitions in 2H10 and our perception of it being a laggard stock