PST – UOBKH

The trump card: debt restructuring.

Setting into motion its target of US$200m worth of ship acquisitions p.a. We believe the re-rating of Singapore shipping trusts is contingent on accretive ship acquisitions. Pacific Shipping Trust (PST) has set a ship acquisition target of S$200m p.a. It rolled this into motion with the recent acquisition of two 4,250 TEU containerships from its sponsor, Pacific International Lines (PIL). These two ships are part of the 38, which PST has the Right of First Refusal to acquire from PIL. The acquisition will increase PST’s current fleet from eight to 10 vessels and raise its fleet capacity by 61% from 13,864 to 22,364 TEUs.

Acquisition is accretive. We estimate PST’s latest acquisition offers an asset yield of 10.5% and an IRR of 8.5%. Whether the acquisition is funded totally by debt at an approximate 6% cost of borrowing or by a mixture of debt and equity at WACC of 7%, the acquisition should be accretive to unitholders. As PST is repaying its debt, falling interest expense will also boost distributable cash and dividend yield, which we forecast will rise from 10.2% in 2007 to 12.6% by 2012.

Debt restructuring is PST’s trump card. PST has a conservative straightline debt repayment period of over 10-12 years from the time it was listed compared with its initial fleet’s remaining economic lifespan of about 26 years. Its debt repayment schedule is conservative compared with First Ship Lease Trust’s (FSLT) and Rickmers Maritime’s (RMT) and explains PST’s FY08 EBITDA yield (after interest expense before debt repayment) of 18.0% compared with FSLT’s 12.6% and RMT’s 11.1%. We do not discount the possibility of debt restructuring though PST’s management presently has no plans to do so. This would place PST on an equal footing with FSLT and RMT. The additional distributable cash flow arising from debt restructuring could be used for ship acquisitions or higher dividend payout.

Yield-based target price: US$0.50. We expect the dividend yields of Singapore shipping trusts to compress due to re-rating on the back of accretive acquisitions, similar to that experienced by their US peers. We expect PST to trade at a dividend yield of 8.5% by end-08 and 8.0% by end- 09. This translates into target prices of US$0.50 and US$0.53 respectively. PST’s current share price trades at a 35% discount to our DCF valuation of US$0.64/share and 0.86x P/RNAV.