Author: tfwee
Shipping – BT
State of the shipping industry
RECENTLY I dropped in on Marine Money Asia Week, a conference that looked at the latest finance and investment opportunities for the shipping and oil service sectors.
I sat through several sessions, and for someone not too familiar with the sector, they were useful in providing information to better understand the dynamics of the industry. So I thought I’d share some of the insights provided by conference speakers with BT readers this week.
Dry bulk sector
Merrill Lynch analyst Teddy Tsai presented a report on Asia-Pacific shipping. He sees the dry-bulk sector peaking in the fourth quarter of this year. Freight rates in the segment, measured by the Baltic Dry Index, have surged more than 200 per cent from the start of 2006 until now. Mr Tsai’s model predicts the peak to be just above 7,500, easing subsequently to about 6,000. However, as of last week the index had broken above 9,000.
He reckons temporary factors that have caused the surge in the BDI – such as port congestion and pent-up demand in China – will ease next year. And a significant supply of dry-bulk carriers will enter the market in 2009-2010.
Mr Tsai’s advice: Take profit on selected stocks and focus on growth-oriented plays.
Meanwhile, London-based research firm Simpson, Spence & Young (SSY) noted that the total dry-bulk order book has surged to 160 million deadweight tons (dwt), with the bulk of deliveries taking place in 2010 as new shipyards come on stream.
The orders are concentrated on the Capesize sector – ships too large to traverse the Suez or Panama canals (that is, larger than Panamax and Suezmax vessels). To travel between oceans, they must go around the Cape of Good Hope or Cape Horn.
On the demand side, the Chinese ore trade is expected to sustain firm rates of growth in the Capesize sector. Based on expected demand and the order books, SSY reckons the supply of dry-bulk carriers will exceed demand by 2010. The number of dry-bulk vessels on order is equivalent to 40 per cent of the existing global fleet.
But SSY said there are three uncertainties: One, the rate of growth in Chinese iron ore imports; two, the ability of greenfield shipyards to meet delivery dates; and three, the number of very large crude carriers (VLCCs) being converted to very large ore carriers (VLOCs).
Right now, dry-bulk companies are enjoying boom times. And the participants in the dry-bulk panel discussion – Hong Kong-listed Pacific Basin Shipping, Oslo-listed Jinhui Shipping, Bangkok-listed Precious Shipping Public Company and Singapore-listed Courage Marine – all painted a picture of abundance.
Said Khalid Hashim, managing director of Precious Shipping: ‘We are in a super cycle. The dry bulk space is going to keep everyone in good spirits for the next 10 to 15 years.’ But he admitted there will be corrections of one to two years in between. Typically, the upcycle is five to seven years. The current pick-up started in early 2003, making the cycle at the tail of the fifth year.
Klaus Nyborg, deputy chief executive of Pacific Basin, said the engine for the dry-bulk market is China. Not like the tanker segment, where the engine is the US.
Added Thomas Ng, managing director of Jinhui: ‘As long as China continues to perform we will continue to do well.’
Mr Nyborg said the Handysize segment – dry-bulk vessels of 15,000-50,000 dwt – is the most attractive. These vessels carry many different products and are not dependent just on iron ore. The average age of the global fleet is 17.8 years and a ship’s expected useful life is 25 years. New orders are low relative to those for other types of vessels. So going forward, supply will not increase too significantly.
According to Mr Nyborg, the current spot market net rate for Handysize is US$37,500 a day versus a vessel’s cost of US$9,370 a day.
Times are so good that if one owns a Panamax – a vessel with the maximum dimensions that can pass through the locks of the Panama Canal – one can pocket $20 million profit a year. And that’s more than the profit made by a lot of Singapore-listed companies, said Hsu Chih-Chien, chairman of Courage Marine.
Courage Marine operates 10 bulk carriers – five Handysize, two Handymax (typically 35,000-60,000 dwt) and three Panamax with a total tonnage of about 455,463 dwt.
Mr Hsu is more conservative compared that his peers. He said the dry-bulk market will be good for the next two or three years but there is a question mark beyond that. As such, Courage intends to stick to its old and tested formula of buying second-hand vessels to enjoy the current cycle.
‘We won’t dare to take the market beyond two to three years,’ said Mr Hsu. ‘For new-building, the vessels will only be delivered in three to four years’ time.’
Even with second-hand vessels, he has reservations given the very high prices now, unless a deal is exceptionally good. Second-hand vessels are currently more expensive than orders for new-builds.
Shipping trusts
Another sector that is very bullish is shipping trusts. All three trusts listed on the Singapore Exchange – First Ship Lease Trust (FSL), Pacific Shipping Trust and Rickmers Maritime – are trading at a dividend yield in excess of 8 per cent. In comparison, shipping trusts in the US are trading at yields of about 6 per cent.
Any yield compression in the trusts in Singapore will see significant price appreciation. For example, FSL is trading at a yield of about 10 per cent. A compression of yield to 7 per cent would mean a 50 per cent increase in its share price.
Ashok Pandit, Deutsche Bank’s head of South & Southeast Asia Equity Capital Markets, said the lack of appreciation of shipping trusts among investors here has kept their prices depressed despite their strong growth.
It’s the same in the US. Shipping trusts did not perform in the first six to 12 months after their market debut. Investors waited for them to develop a track record before bidding up the price. Similarly, shipping trusts in Singapore will need to demonstrate their ability to acquire earnings-accretive vessels.
Of the three trusts in Singapore, Pacific Shipping and Rickmers are in the container segment. The former operates 10 vessels and the latter six, with 12 to be delivered.
FSL is diversified. It has four container vessels, seven product and three chemical tankers, and two dry-bulk carriers.
The panellists pointed out that unlike real estate investment trusts or Reits, where the underlying assets can appreciate in value over time, ships are depreciating assets. However, they can deliver sustained dividends. As the vessels are chartered out for seven to 10 years, they are not affected by the shipping cycle.
DBS Vickers pointed out in a report that one of the short-term risks of shipping trusts in Singapore is the weak US dollar. ‘All shipping trusts generate US$-based cashflows,’ it said. ‘In the case of Rickmers, which is S$ listed, the yield for FY08 can drop from 8.2 per cent to 7.8 per cent in the event that the US$ depreciates 5 per cent from current levels.’
AllCo – SGX
ALLCO REIT TO ACQUIRE KEYPOINT, SINGAPORE
Key Highlights
Sale and purchase agreement signed to acquire KeyPoint in Singapore for S$370.0 million
Exposure to an investment grade quality commercial asset located in the CBD fringe
Opportunity to capitalise on the tightening Singapore office supply
Acquisition is yield accretive to Unitholders and increases Asian presence of Allco REIT portfolio
Singapore, 5 Oct 2007 – Allco (Singapore) Limited (“Manager”), the manager of Allco Commercial Real Estate Investment Trust (“Allco REIT”) (SGX:ALLC) announced today that British and Malayan Trustees Limited, as trustee of Allco REIT, has entered into a sale and purchase agreement with Sable Resources Pte Ltd (“Vendor”) for the acquisition of KeyPoint, 371 Beach Road, Singapore (“KeyPoint” or the “Property”). The Property is being acquired for a total purchase price of S$370.0 million1 (“Purchase Consideration”).
KeyPoint is an integrated 25-storey commercial development located at the junction of Beach Road and Jalan Sultan, Singapore. With a total net lettable area (“NLA”) of 311,892 sq ft (28,976 sqm), the Property comprises a three-storey podium and a 22-storey office tower.
KeyPoint also has a four storey car park block consisting of 227 car bays. The Property is wellserved by both the Bugis and Lavender MRT stations, which are each located within 600 metres of the Property. Its accessibility will be further enhanced by the upcoming Nicoll Highway MRT station on the Circle Line, which will be approximately 200 metres from the Property and which is expected to be operational from 2010 onwards.
KeyPoint is being acquired on an assumed initial net property income yield of 4.65%2 for the first 12 months. The acquisition is yield accretive and will provide net uplift to Allco REIT’s rental income base, enhancing distributable income to Unitholders. The acquisition represents a total purchase price of S$1,186 per sq ft. Further details in relation to the Property are set out in the accompanying presentation and SGX-ST announcement.
The acquisition will be funded entirely by debt at a total cost of approximately 3.6%. Following the completion of the acquisition, Allco REIT’s leverage (calculated as gross borrowings plus deferred payments divided by total assets) will increase to approximately 46.5%, which is within the aggregate leverage limit as set out in the guidelines in Appendix 2 of the Code on Collective Investment Schemes issued by the Monetary Authority of Singapore (“Property Funds Guidelines”). Allco REIT has an investment grade credit rating from Moody’s Investor Services Inc. which, under the Property Funds Guidelines, permits gearing of up to 60.0%.
Upon completion of the KeyPoint acquisition, Allco REIT’s portfolio exposure to Asia will increase to approximately 67.2%, and the total portfolio base by asset value will grow to approximately S$1.83 billion. With a greater exposure to Singapore, Allco REIT intends to capitalise on the continuing strength of the commercial property market which is supported by the sound fundamentals of the Singapore economy.
Key portfolio benefits:
Reinforces Allco REIT’s pan-Asian investment strategy
Acquisition is expected to be yield accretive (refer today’s SGX-ST announcement)
Property to be acquired at a discount to independent valuation
Enhanced Asian presence
Reduction of Australian exposure to less than 33% of total NLA
Key property highlights:
95.9% occupancy
Passing gross rents significantly below market
Significant lease renewal in the next two years
Conveniently located, 5 minutes drive from the CBD, within walking distance to two MRT
stations and situated in the vicinity of major buildings
Close to Circle Line Nicoll Highway MRT station currently under construction
Asset includes high traffic retail area of 10.6% of total NLA
227 parking bays on-site
Potential asset enhancement in the medium term
Mr Nicholas McGrath, Chief Executive Officer and Managing Director of the Manager said, “The acquisition of KeyPoint reinforces Allco REIT’s pan-Asian investment strategy and reduces our Australian exposure to less than 33%.”
“Given the current office supply constraints and rising office rentals in the CBD, this is an opportunistic time to be adding a quality, investment grade commercial asset that is located in the Singapore CBD fringe. We are confident that properties in the CBD fringe will provide alternative leasing premises to the core CBD areas and that there is a strong likelihood of good rental growth from the Property in the near term. Over 50.0% of the NLA expires in KeyPoint in the coming year and management intends to capitalise on this through a strong asset management plan.”
“KeyPoint is well-positioned to leverage on the future growth and rejuvenation of the surrounding Beach Road precinct with the completion of the Sports Hub and the recently-awarded integrated commercial development at Beach Road. The Property will have enhanced accessibility via a covered pedestrian walkway to the upcoming Nicoll Highway MRT station, in addition to the close proximity to current MRT stations on the East-West line”, Mr McGrath said.
1 All references to Purchase Consideration in this release exclude expenses associated with the acquisition.
2 Inclusive of income support of up to S$10.5 million, to be provided by the Vendor for a period of two years from completion of the acquisition.
Source : SGX
MI-REIT – Phillip
MI-REIT announces its third acquisition since IPO, bringing its total value of announced acquisitions to $126.1 million.
MI-REIT completed the acquisition of 541 Yishun Industrial Park A on 4th Oct 2007. The property will be leased back to the tenant for a 12 year lease term with a built-in rental escalation structure. With an acquisition target of $500 million annually, we believe there will be more annoucements coming up.
About the properties. The latest acquisition improves the lease expiry profile as well as the diversification of the property portfolio. WALE will improve from a pre-acquisition of 6.3 years to 7.06 years post-acquisitions. The acquisitions will be fully funded by debt. Gearing post-acquisitions of 7 Clementi Loop and 541 Yishun Industrial Park A will increase to 16%. With
a gearing limit of 60% and a further $159 million of corporate debt facility, MI-REIT still has much debt room for further acquisitions.
Valuation. We revise our revenue to factor in the contributions from the latest acquisition. Our forecasted DPU increases to 7.48 cents for FY08 and 7.96 cents for FY09, translating to a yield of 6.33% and 6.74%. Our fair value remains at $1.39, derived from our DCF model. Reiterate Buy.