PST – OCBC

Acquisitions help increase DPU

Strong quarter, once again. Pacific Shipping Trust (PST) enjoyed a great 2Q, bringing home US$10m in revenue, up 16.6% YoY and 13.4% QoQ. Earnings were boosted by the full quarter contribution of 1Q buy Kota Nabil and new 2Q acquisition Kota Naga. Net profit came in at US$8.3m, including US$3.8m in non-cash gains. The trust’s earnings came in slightly ahead of our estimates with the new vessels enjoying lower interest costs compared to previous debt-funded buys. Last quarter, PST had reduced cash distributed to 90% of distributable income (after debt repayment) from 100% previously. 1Q DPU consequently fell 12% QoQ to 0.97 US cents. For 2Q, PST will pay out 1.09 US cents a share – up 12% QoQ, back to 3Q07 levels (see Exhibit 1). We expect DPU to continue to increase thanks to the full-quarter contribution of Kota Naga in 3Q and the other two vessels coming in over 2H08.

Acquisitions help increase DPU. PST has been able to increase its DPU despite the reduced payout because of its new acquisitions. The new 2008 assets have a lower asset yield vis-à-vis the initial portfolio (still high relative to other shipping trusts). However, they are more DPU accretive due to a) lower finance costs, and b) more favorable debt repayment terms versus the initial portfolio. Recall that distributable income is from cash remaining after debt is repaid so DPU accretion from debt-financing vessels hinges on the repayment pattern. Debt on the initial portfolio is being paid off quite conservatively over about 11 years. After all four vessels slated for the year come in, we estimate the overall repayment scale will lengthen to a quite reasonable 20 years versus a typical asset life of 25-30 years. We believe this is still a sustainable debt repayment model (which preserves equity by reducing liabilities in line with the erosion in vessel value).

Equity issue inevitable. PST is at a 1.3x debt-to-equity level as of 30 Jun, up from 1.05x at 31 March. We estimate that PST’s debt-to-equity will hit around 2.1x by year end after all 2008 acquisitions are completed. The trust has a yearly acquisition target of US$200m. While we continue to feel a sustainable debt-to-equity level is 1x, the trust has been able to “postpone” an equity issue by increasing gearing beyond 1x in the nearterm. At this acquisition pace however, the need for fresh equity is inevitable. Maintain BUY with US$0.48 fair value estimate.