Shipping Trusts – DBS
Offering yield plus growth
Story: We attended Marine Money’s session on Shipping Trusts yesterday that was held at the Grand Hyatt Hotel. Sitting on the panel were management from the three SGX-listed shipping trusts – Rickmers Maritime, Pacific Shipping Trust and First Ship Lease.
Point: Management reiterated that the structure of a shipping trust is to deliver yield and growth, and that its performance and cashflows is not tied to the shipping cycle. In addition, shipping trusts need to deliver growth that was promised at IPO. In some cases to take advantage of opportunistic acquisitions, a strong Sponsor is clearly advantageous.
Relevance: We hold the view that shipping trusts offer attractive yields, averaging 9.4% for FY08 and are lagging US peers which are trading at an average yield of 6.7%. Maintain Buy for Rickmers Maritime (Buy, TP S$1.80) and Pacific Shipping Trust (Buy, TP S$0.52). We have no rating for First Ship Lease.
Panel represented by management from the three SGX-listed shipping trusts. Rickmers Maritime (RMT) was represented by CEO Thomas Preben, Pacific Shipping Trust (PST) by CEO Capt Subhangshu Dutt and First Ship Lease (FSLT) by President and CEO Philip Clausius.
Significant yield compression seen for US peers. Peers in the US operate under a Master Limited Partnership, a structure that is quite similar to a Shipping Trust structure. Yields have been compressed to an average 6.4% compared to listing yields of c.8%. The main trigger, we believe, was that these MLPs demonstrated an ability to grow via acquisitions. For comparison, RMT is offering a yield of 8.2%, while PST is trading at 9.7% and FSLT at 10.3%.
Growth through acquisition post listing. In our opinion, RMT and FSLT have demonstrated the ability to grow via acquisitions only after a few months of listing. On the other hand, PST has taken about a year to put in place growth initiatives. To elaborate :
(a) RMT’s Sponsor, the Rickmers Group, granted a Right of First Offer (ROFO) to RMT at IPO. Under this, nine 4,250 TEU container vessels were identified for injection into RMT. So far, RMT has entered into an MOU to acquire four 4,250 TEU vessels for delivery between Feb and Dec 2009. Separately, RMT has also entered into an MOU to acquire four 13,100TEU vessels for delivery between Aug and Nov 2010. Thus, capacity will rise 170%, from 40,910 TEUs to 110,310 TEUs by end 2010.
(b) Under the Right of First Refusal granted at IPO, PST plans to acquire two new 4,250 TEU container vessels from PIL for charter to CSAV, raising its capacity by 61% from 13,864 TEUs to 22,364 TEUs by end 08.
(c) Since IPO, FSL has acquired three product tankers, adding to its IPO fleet of four product tankers, three chemical tankers, four container vessels and two bulk carriers.
All three are below IPO prices, short-term risk is the weak US$. Besides a new asset class, we think that another factor for its underperformance has been the weakening US$. All shipping trusts generate US$-based cashflows. In the case of RMT which is S$-listed, the yield for FY08 can drop from 8.2% to 7.8% in the event that the
US$ depreciates 5% from current levels.