Author: tfwee
Rickmers – UOBKH
4Q07 Distributions in line with management guidance
Rickmers Maritime (RMT) announced net profit of US$20.6m for FY07. This was 25% higher than what we had forecasted due mainly to higher negative goodwill on business combination and amortization of unfavourable charter rates (US$9.148m vs. US$6.116m) than what we had provided for. Bear in mind that these two items are accounting items and non-cash items and have no impact on distributable cash. Charter income for the period was about 1.2% higher than our forecasts mainly due to early delivery of two vessels in Dec 2007.
Distributable Cash Per Unit higher on early vessel deliveries. Distributable Cash Per Unit (DCPU) for the period came in at 6.5 US cents about 2% higher than what we had forecasted. This can be attributable to slightly higher charter income due to the early delivery of two vessels in December 2007. Distribution Per Unit (DPU) announced for FY07 was 5.64 US cents, in line with management’s guidance, but slightly lower than our expectations of 5.77 US cents as management has retained a larger portion for future acquisitions. For 4Q07, DPU paid will be 2.14 US cents and will be paid out on 27 March 2008. RMT units will trade ex-Distribution on 12 March 2008.
Maintain BUY: Target price unchanged at US$1.19 (S$1.68). We believe that the sell down in RMT’s shares is unjustified given the defensive nature of the earnings and distributions, due to its vessels being chartered out on long term fixed timecharters, with an average duration of nine years. Furthermore, RMT focuses on only the top liner companies in the world and its customers include Maersk Lines, CMA CGM, Italia Marittima, Hanjin Shipping and Mitsuit O.S.K. Lines. The shipping trusts in the US have rebounded following the fall in global equities in Nov 07 and are currently trading at distributions yields of about 6.0 to 6.5%. RMT is currently trading at an attractive distribution yield of 12.2%. We reiterate our BUY recommendation on RMT, with a target price of US$1.19 (S$1.68).
MMP
Macquarie Supports Strategic Review of Macquarie MEAG Prime REIT
Macquarie Real Estate Singapore (MRES) advised today it supported the decision of the Board of Macquarie Pacific Star Prime REIT Management Limited (the Manager of Macquarie MEAG Prime REIT (MMP) (SGX: MMPR.SI)) to conduct a review of strategic options with the specific objective of enhancing value for all MMP Reit unitholders.
MRES is a substantial unitholder of the REIT with a 26 per cent holding. Another Macquarie Group entity has an indirect 50 per cent interest in the REIT’s Manager.
MRES supports the Board’s decision to undertake the strategic review because it has received a number of offers for its 26 per cent interest in MMP REIT units, and in the interests of all MMP unitholders, would like for all unitholders to be able to participate in any proposal on the same basis as Macquarie.
While MRES has made no final decision in relation to its stake in MMP as this is dependent on the outcome of the strategic review, it is committed to seeking to find ways to provide all MMP unitholders with access to value-maximising proposals.
FSL – OCBC
Quasi-debt instrument with attractive yields
Basic attraction is distribution yield. First Ship Lease Trust (FSLT) is a listed shipping trust. Its shipping income is tax-exempt and distributions are also tax-exempt for all investors. Based on its existing assets, FSLT offers an annual distribution of 10.332 US cents for FY08. With its current price at S$1.13, this amounts to a whopping yield of 12.9%. In comparison, the Singapore 10-yr government bond yields 2.3%.
Distribution payout not just return on asset. Part of FSLT’s high distribution payout consists of a return on the unit-holders’ invested capital. Vessels are depreciating assets and FSLT fully pays this amount out every year. So while the payout is high, the value of assets has declined correspondingly. FSLT also pays out the depreciation charge (or part of the principal) on its leveraged assets. This is similar to the return of unitholders’ capital, except that FSLT is paying out the debt principal to unit-holders. This boosts payout in the earlier years, but ultimately unitholders have to repay debtors in the later years.
Acquisition plans. FSLT is targeting US$300m worth of acquisitions every year. It is aiming for an average asset yield of 10.5% and a target IRR of about 7.5%. There is no regulatory ceiling on its gearing, and FSLT’s longterm debt-to-equity target is 1x. Since listing, it has made about US$158m worth of debt-funded and DPU accretive acquisitions. We believe that once FSLT hits the 1x debt-to-equity target, it would look to raise new equity – which based on its yearly US$300m target could be as early as 2009.
Initiate coverage with BUY rating. Our DCF valuation only looks at the value of the unitholders’ stake in the trust – that is, the remaining value after repayment of debts. Our valuation assumes another US$330m worth of acquisitions over FY08-09 based on debt-to-equity of 1x. Using above, our DCF value is S$1.25, or a 10.6% upside from the current price. This assumes that the investor sticks with FSLT until the end, when all debts would have to be repaid (we estimated 2015 but FSLT plans to refinance as and when its facilities mature). However, for the next 1-2 years, we acknowledge that FSLT offers much higher returns based on the estimated DPU from its existing assets and its intention to continue making various DPU accretive acquisitions. We are initiating coverage on FSLT with a BUY rating.
Budget 2008
From Budget 2008. The Key initiatives for REIT and Trust is as followed:
- Allow listed real estate investment trusts (REIT) and registered business trusts to claim input GST on business expenses
MI-REIT – Phillip
3QFY08
MacarthurCook Industrial REIT (MIREIT) reported financial results for 3QFY08. MIREIT reported gross revenue of S$8.4 million and net property income of S$6.3 million. Distributable income amounts $5 million, translating to a DPU of 1.92 cents for the quarter and an annualised DPU of 7.62 cents.
Acquisitions during the quarter contributed to top-line growth. Gross rental revenue increased 14.5% compared to the last quarter and net property income rose 6.5%. However net income dropped 7.1% mainly due to higher management fee, borrowing cost and trust expense associated with an enlarged portfolio size. DPU for the quarter increased from 1.86 cents in 2QFY08 to 1.92 cents in 3QFY08.
MIREIT expanded its portfolio from 12 properties at IPO to 19 properties currently, with a further 3 in progress of completion. Asset size grew from S$316.2 million to S$512.6 million. NAV increased from $1.13 to $1.30. Current gearing stands at 34.4%. We note that gearing will increase to 40% upon completion of in-progress acquisitions.
Capital management. Including the completed acquisitions, MIREIT has debt of $176 million, which has an expected maturity in April 2009. MIREIT has in place derivative instruments to manage its borrowing costs.
If the base rate continues to stay low, we estimate that the effective interest rate will be 2.5%, however we have assumed a cost of debt of 3.5% in our valuation model to stay conservative.
Valuation and recommendations. MIREIT has no short term debt concern and the initial low gearing has given it the capability to expand with debt funding. Although it has delayed a capital raising exercise recently, there is no short term refinancing issue and gearing is within management’s target range of 40%-45%. We retain our revenue estimates at this point with a FY08F DPU of 7.76 cents, which would translate to a yield of 8.21%. We have raised the beta and risk premium used in our DCF model to account for investor’s lower risk appetite and the volatile market condition. Fair value derived from our model is lowered subsequently from $1.43 to $1.13. Maintain buy.