Shipping Trusts – DB

Laggards with yield and growth

Buy FSLT and Rickmers
FSLT and Rickmers have lagged the STI by 17% and 14%, respectively, over the last three months. In FY08, we expect FSLT’s yield of 12% to be the highest among Asian stocks that DB covers. Rickmers’ 8% yield is not far behind. Further, we expect acquisitions to see DPU growth of 22% for FSLT and 10% for Rickmers during FY07-09. We prefer FSLT because of its superior yield and forecasted DPU growth.

Steady cash flow from acquisitions; Second hand vessel prices may surprise.
Cash flows are backed by LT contracts with the earliest expiry in seven years time and not affected by rate volatility. Experience in the US indicates that yield compression will happen as dividend accretive investments are made. There is also an under-appreciated possibility that second hand vessel prices may actually go up in situations of tight demand and limited supply, enhancing book value. We estimate that FSLT’s book value is 10% understated because of the rise in bulk vessel prices.

Under-researched laggards; Management keen to see share price perform.
We think there is great room for the laggard performance to turn around over the coming 12 months, especially since this sub-sector still appears to be underresearched, with only three brokers covering FSLT and Rickmers. In our view, managements of both FSLT and Rickmers seem committed to seeing the share price better reflect the underlying value, therefore enhancing the equity fund, raising options in the future.

DCF valuation and yield; Key risk is credit risk.
The two key valuation matrices we have employed are DCF and dividend yield. We have valued FSLT at US$1.10/share based on an assumption of US$200m worth of acquisitions in each of FY08-09. This translates to a yield of 9% in 2008. For Rickmers, the acquisition pipeline is more visible and we have assumed that it increases its capacity by 2.9x by end 2010. We have a TP of S$2.25/share, which is based on DCF and would imply a FY08 yield of 5.8%. The key risk to shipping trusts relates to credit risk of the charterers. Future cash flows will be in jeopardy
if one of the clients of the vessels does not pay charter fees.