Equity cash call, as expected

Equity cash call… Pacific Shipping Trust (PST) has announced a nonrenounceable preferential offering (PO) of 252.75m new units, on the basis of three new units for every four existing units. Pacific International Lines (PIL), PST’s sponsor and 34.64% unitholder, has agreed to subscribe for its pro-rated shares as well as any unsubscribed units. An EGM will be held on 27 August to obtain unitholders’ approval. The issue price of 36.5 US cents per new unit is at a 5.2% discount to Friday’s close of 38.5 US cents, and a 18.9% discount to PST’s IPO price of 45 US cents.

…as expected. We had repeatedly stated in our previous reports that an equity cash call was imminent as PST’s 2008 acquisitions and future acquisition plans (it has a soft target of US$200m in new vessel buys per year) stretched its leverage levels uncomfortably. PST estimates it will raise about US$92.3m in gross proceeds from the offering, which will be 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 (delivered in May); CSAV Laja (expected mid-September); and CSAV Lauca (mid-November).

Expect more of the same. 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 post the PO. We believe debt-to-equity beyond 1x is not sustainable in the long run – for one thing, debt repayment terms and schedules are more unfavorable as leverage increases. This current PO is part of PST’s ongoing debt-first-equity-later business model. If PST spends another US$200m in FY09 as per its acquisition target, we expect its debt-to-equity to again spike to roughly 1.7x by end 2009 – and bring it closer to its next equity injection.

Lowering fair value. We have revised our estimates to take the PO into account with our net profit estimates rising by 7-22% due to reduced interest expenses after the PO. The larger unit base (up 75%) more than offsets the decrease in interest expense, however, and our FY08F and FY09F DPU estimates¹ fall 4-30% to 4.27 US cents and 3.87 US cents, implying distribution yields of 11.6% (FY08F) and 10.5% (FY09F). We are lowering our fair value estimate to US$0.41 from US$0.48 previously to take into account a higher cost of capital and a more uncertain industry outlook. Maintain BUY.

¹ We assume a 90% payout is maintained

Attractive yield

Story: PST has announced plans to raise 272.75m new units (representing a 75% increase in units issued) at US$0.365 per unit. It will be offered to shareholders on the basis of 3 new units for every 4 units held. The EGM is scheduled to take place on 27 Aug and the exercise to be completed by end Sep 08.

Point: Total net amount raised of US$90.2m will be used to partly fund its vessel acquisitions of US$222m, of which two have been delivered, another two scheduled for delivery in Sep 08 and Nov 08 respectively. The acquisition of these four vessels will raise its fleet size to 12 vessels and its slot capacity by 87% from 13,864 TEUs to 25,964 TEUs. The equity fund raising exercise (EFR) will also result in PST having debt headroom of US$120m (translating to leverage of 60%) for future acquisitions, either from PIL’s pipeline and/or third parties.

Relevance: PST is the first shipping trust to undertake an EFR. Our forecast assumes US$120m of acquisitions for next year. We estimate DPU to be 4.1UScts and 4.2UScts per share for FY08 and FY09 respectively based on a 90% payout ratio. At US$0.375, PST is offering a yield of 11.1%. We peg a target price of US$0.45 (adjusted down from US$0.52) based on a target yield of 9%, the average of closest peers Danaos and Seaspan. Maintain BUY.

Pacific Shipping to raise US$92.3m

Proceeds set to finance part of cost of 4 new vessels

AS the global credit crunch starts to affect Singapore shipping companies, Pacific Shipping Trust (PST) yesterday announced a plan to raise US$92.3 million from the stock market through a non-renounceable preferential offering of new units. The proceeds are mainly intended to finance and refinance part of cost of four new vessels.

PST proposes to issue 252.8 million new units at 36.5 US cents per new unit – a 5.2 per cent discount to the average traded price on Friday – on the basis of three new units for every four existing units. The trust’s sponsor, Pacific International Lines (PIL) has undertaken – subject to some conditions – to subscribe and pay for its provisional allocation of the new units, as well as any new units that remain unsubscribed.

PIL is the major unitholder of PST with a current direct interest of 34.6 per cent.

‘In light of the current tight credit markets, the preferential offering represents a unique opportunity for unit holders to participate in a capital-raising exercise that provides certainty of funding, as it is fully supported by our sponsor PIL,’ said trustee-manager PST Management’s CEO Alvin Cheng.

‘While financing for the new vessels has already been secured, the proceeds of the preferential offering will lower our aggregate gearing, providing us with the financial flexibility to react swiftly as yield-accretive investment opportunities arise.’

The move will help strengthen PST’s balance sheet and reduce its leverage to 50 per cent from 69 per cent, Mr Cheng said. This will increase PST’s borrowing capacity to US$120.5 million and enable it to pursue medium-term yield growth opportunities.

Leverage of 70 per cent is about the maximum that lenders are comfortable with, and the fresh capital will give the trust more flexibility.

The increased capital base could also increase trading liquidity, with the percentage of trading units potentially rising to 75 per cent if minority unit holders take up all their allotments, PST said.

PST closed one US cent lower at 37.5 US cents yesterday.

Proposes a non-renounceable 3-for-4 rights issue at US$0.365/unit

Proposes a non-renounceable 3-for-4 rights issue. Pacific Shipping Trust (PST) has announced a non-renounceable rights issue of 252.75m units at US$0.365/unit (5.2% discount to the volume weighted average share price on last Friday) to raise US$92.3m cash to partially fund the acquisition of four vessels, namely two 1-800-TEU container vessels – Kota Nabil and Kota Naga – and two 4,250-TEU container vessels – CSAV Laju and CSAV Lauca. These four vessels are acquired at a total cost of US$222m and will increase PST’s shipping fleet from eight to 12 vessels. The rights issue will be on the basis of three new units for every four existing units held. Pacific International Lines (PIL), PST’s sponsor, undertakes to subscribe for its entitlement, based on its current direct stake of 34.64% in PST. PIL also undertakes to subscribe new units that are not taken up by minority unitholders, without triggering a mandatory offer. The rights issue is expected to close by end-Sep 08.

Dividend yield will be intact. PST targets a long-term debt-to-assets gearing of 60%. 98% of the net proceeds of circa US$90m from the rights issue will be utilised to reduce borrowings incurred for the acquisition of new container vessels in 2008. We revise our 2008, 2009 and 2010 net profit forecasts by 0.6%, 18.9% and 16.7% respectively to US$16.5m, US$25.8m and US$27.2m. However, we adjust downward our 2009 DPU from 4.7 US cents to 4.4 US cents due to a marginal dilution by the rights issue despite interest savings. 2010 remains unchanged at 4.7 US cents.

Balance sheet strengthened for more vessel acquisitions. Post rights issue, the trust would have a balance credit facility of US$121m for acquisition of additional vessels, which should enhance future DPU. Our earnings forecasts have not factored in the acquisition of other vessels besides the four new vessels acquired in 2008. In view of a reduced forecast DPU for FY09, we lower our target price from 50 US cents to 47 US cents. Our fair value is pegged at FY09 net yield of 9.5%. PST offers an annual net yield of 11.7% for 2008 and 2009 and 12.5% for 2010. Despite a large rights issue, PST still offers very attractive dividend yields.