FSL – UOBKH

1Q08 DPU in line with expectations; acquisitions to boost future DPU

First Ship Lease Trust (FSLT) has announced its 1QFY08 results. Charter income came in at US$16.6m, accounting for 25.2% of our forecasts, in line with expectations while distributable cash was US$13.0m, accounting for 25.0% of our full year forecasts. Likewise, Distributions Per Unit (DPU) was within expectations at 2.59 US cents, accounting for 24.9% of our full year DPU forecast.

Earnings below expectations: Tripped by depreciation. Earnings for the period came in at US$1.7m accounting for 14.4% of our full year earnings forecasts. This is because depreciation for the period was US$11.2m vs. our estimated US$10.0m. After factoring in the higher depreciation, earnings for the period would have accounted for 25.2% of our FY08 forecasts. FSLT’s depreciation policy is to depreciate the cost of the vessel over the life of the base
lease term to an expected residual value which has not been disclosed. As the residual value for FSLT’s fleet is not disclosed, our estimated depreciation estimate was 10.7% below the actual value.

Acquisition of 2 crude tankers from Geden Lines, Turkey’s largest shipping company. On 21 April, FSLT announced the acquisition of 2 115,000 DWT crude tankers for a total consideration of US$140m. The acquisition prices are in line with recently transacted sales (US$70m for 105,000 DWT). Built by Samsung Heavy Industries, the two vessels are both less than a year old. The two vessels have been concurrently leased back to Greden for a lease term of 10 years. Lease payments are on a floating basis resettling on a quarterly basis in line with changes in the 3-month US$ Libor rate.

Management guidance on DPU accretion seems reasonable. FSLT has guided that the vessel acquisitions will generate an additional 0.16 US Cents for 2QFY08 and an additional DPU of 0.28 US Cents for each full calendar quarter thereafter. Based on the DPU guidance, we estimate the bareboat charter rate at present to be about US$20,000/ day which seems reasonable as it is at a discount to the current three-year timecharter rate of US$28,000 for vessels of this class as reported by Clarksons. The implied asset yield is about 10.0%.

Stable and visible distributions: Maintain BUY. We continue to like FSLT for its stable and visible distributions which are supported by its long bareboat charters which have an average remaining lease term of approximately 8.6 years. With an undrawn credit facility of US$150m, FSLT can continue to fund most of its remaining US$160m acquisition targets with low cost debt. We maintain our BUY recommendation on FSLT and raise our target price to from US$1.22 to US$1.24 (S$1.61) based on a FY09 yield-based target of 9.0%. We have also reduced our earnings forecasts to account for FSLT’s aggressive depreciation policy (FY08: -43%, FY09: -37%, FY10: -37%).