PST – OCBC

DPU hit by a reduced distribution payout

Results in line but… Pacific Shipping Trust (PST) posted 1Q results yesterday and things were generally in line. The first vessel out of the four acquisitions slated for 2008, Kota Nabil, was delivered in March and made its maiden contribution of 21 days of income. Gross revenue from charter income rose 4% to US$8.85m. All other charges were line except for a spike in expenses due to non-recurring charges arising from the four acquisitions. Cash income, the amount available for distribution, rose 9% YoY to US$3.7m, or 1.1 US cents per unit.

…DPU hit by reduced payout. However, PST decided to reduce its distribution payout to 90% – or a DPU of 0.97 US cent, down 7% YoY and 12% QoQ. That works out to a distribution yield of 9.3%, much lower than the other shipping trusts which are trading at over 11% yields. The press release offered a vague and contradictory explanation: On one hand, PST’s board feels that “given current financial market conditions, [it] would be prudent to set aside cash”. In the same breath – and sentence – the board is also saying that the cash is to provide working capital for growth and expansion, not for debt reduction. We note that after completing these four acquisitions, PST’s debt-to-equity ratio will hit 2x or more by yearend. At some point, an equity issue is inevitable.

Is DPU reduction permanent? A lower payout does not have to mean a lower full-year DPU, due to the new acquisitions that are coming in this year. In 2Q, Kota Nabil will make a full quarter’s worth of contribution. The other three vessels will also arrive progressively through the year. Depending on the interest expense on the new vessels, full-year DPU could still be higher than last year’s despite the reduced payout. Additionally, payout going forward is “at least 90%” so the amount retained could fluctuate QoQ.

Reducing fair value. PST’s house is still in order – its fundamentals are going strong, especially as 2008’s four acquisitions start kicking in. But a clear and coherent narrative from PST as to why they reduced payout – and for what – has yet to emerge. This story is still building. For this reason alone, we cut our fair value estimate to 48 US cents, almost 13% lower than our previous estimate. We will revisit our estimates as the narrative builds. Maintain BUY.