PST – OCBC

Stronger balance sheet post offering

Acquisitions boost 3Q. Pacific Shipping Trust (PST) posted US$11.2m in revenue for 3Q08, up almost 12% QoQ due to the first full quarter contribution from new vessel Kota Naga and 14 days of time charter income from PST’s latest vessel CSAV Laja. Its results were generally in line with our estimates, except for higher than expected time charter expenses due to start-up costs. Income available for distribution rose to US$4.3m, up 3.6% QoQ. The trust will distribute almost 1.10 US cents to unitholders on pre-preferential offering (PO) units.

PO completed in 3Q. PST raised about US$92.3m in gross proceeds from its PO. Sponsor Pacific International Lines (PIL) had agreed to subscribe for both its pro-rated shares as well as any unsubscribed units. Approximately 57.2% of the new units were unsubscribed, and PIL has subsequently seen its stake in PST increase from 34.64% to 59.2% after the partial equity “bail-out”. Charters to PIL, a top 20 liner company1, account for about 70% of PST’s annual revenue. In essence, the risk quantum for PST has become a proxy for the risk of the parent company.

Stronger balance sheet post PO. While we do not like the smaller free float, the benefits of having a strong sponsor and a stronger balance sheet are clearly advantageous in the current climate. The PO proceeds are being used to finance and refinance the four new vessels costing US$222.2m slated for acquisition in 2008: Kota Nabil (delivered in March); Kota Naga (May); CSAV Laja (mid-September); and CSAV Lauca (expected in mid- November). Fully debt-funded, the 2008 acquisitions would have bumped PST’s debt-to-equity up to 2.1x by year end. We are now projecting a debt-to-equity level of 0.9x at year end with no near-term debt expiry. PST has a conservative loan repayment structure (which we like) and no capital commitments post 2008. We also like PST as it is the only Singaporelisted shipping trust without a loan-to-market value covenant on its loan documents – so there is no risk of a technical default because of falling asset values.

Downgrade to HOLD. For the reasons discussed above, the risks on PST are potentially lower than its peers – but these still exist. Our focus is on the business risk stemming from the looming global recession and difficult credit conditions: a charter party defaults or charter rate renegotiation and consequent asset devaluation. A shock on the revenue side is especially of concern as PST utilizes about 40% of its cash income on debt repayment. Downgrade to HOLD with 24.5 US cents fair value.