Category: FSL
Shipping Trusts – OCBC
3Q results preview
3Q results preview. We expect FSL Trust and Pacific Shipping Trust to release 3Q09 results next week, with Rickmers Maritime following later in the season. We will be tracking: 1) performance of the trusts’ charters; 2) balance sheet factors including loan-to-market-value levels and repayment schedules; and 3) how this translates to forward strategy and DPU guidance. Maintain UNDERWEIGHT on the sector as we believe the unwinding of this leveraged play structure is still playing out. The shipping industry is still hurting and counterparty risk and aggressive leverage remains a key concern. FSL Trust [BUY, S$0.72 fair value] is our preferred pick for its diversified vessel portfolio.
FSL Trust (FSLT). In September, FSLT secured loan-to-value (LTV) covenant waivers and raised equity through a placement. As such, we expect 3Q results to be fairly uneventful relative to the other two trusts. FSLT is the only trust to have given clear guidance for 3Q09 payout: 1.5 US cents is guided for pre-placement unitholders (1.27 US cents already paid out). We expect the trust to meet its guidance. The placement proceeds are earmarked for acquisitions but it may be too soon to expect concrete news on this front.
Pacific Shipping Trust (PST). Rate renegotiation discussions with customer CSAV are now in their sixth month with no resolution achieved so far. 3Q09 revenue will likely outperform our expectations as we had priced in a rate cut from 2H09 onwards. Our view is that it is only a matter of time before some flavor of rate concession is granted. Meanwhile, PST’s Board is reconsidering its payout strategy and has only said that 3Q09 payout will be no less than 70% of distributable income. This may be a significant quarter as the Board spells out its forward payout and growth strategy. PST has already outlined its ambitions to grow, but any serious attempt would require fresh equity, in our opinion.
Rickmers Maritime (RMT). RMT paid out 0.6 US cents DPU in 2Q09, and its circumstances are unchanged. We don’t expect any immediate resolutions to its challenges including LTV covenant breach concerns, maturing loans, and an outstanding order book. We do not believe there is scope for DPU increase till these issues are resolved and believe it more prudent to not price in any payout. While fresh equity may be eventually necessary, loan covenant concerns create a chicken and egg situation. Like FSLT, RMT may need to secure (at least conditional) LTV waivers before it can attempt to raise equity.
Shipping Trusts – UOBKH
Share Prices of US Peers Rally 30-60% wow
US peers rallied 30-60% wow; CCFI rebounded 26% from trough. Share prices of Danaos Corporation (DAC US) and Seaspan Corporation (SSW US), US peers of the Singapore shipping trusts, soared 58% wow and 32% wow respectively. The China Containerized Freight Index (CCFI) has rebounded 26% from its recent trough of about 750-945.3. We have not yet seen an upturn in the share prices of Singapore-listed shipping trusts similar to the recent rally of their US peers.
Stock Recommendations
FSLT. FSLT recently raised S$42m via a private placement to fund acquisitions. Accretive acquisitions will boost its distributable cash. However, the trust may need to raise equity for its outstanding loan balance of US$400m due for bullet payment in 2012 and 2014, and this may lead to yield dilution. Thus, we maintain HOLD on FSLT but raise our fair price from S$0.62 to S$0.70 based on a higher container shipping sector
2010F P/B of 0.91x (previously 0.81x).
PST. We forecast PST’s 2009 and 2010 dividend yields at 11.7% and 9.3% respectively after adjusting for the reduction in the distribution payout ratio from 90% to 70%. The cash retained will be applied to finance acquisitions. Accretive acquisitions may drive a re-rating of the stock. Maintain BUY with a target price of US$0.37.
RMT. We reduce our fair price from S$0.76 to S$0.55 based on a lower 2010F P/B of 0.32x (previously 0.40x), a shade below US peer Danaos’ P/B of 0.54x, because RMT would have a similarly very high net gearing of 4.0x, This is assuming the availability of debt financing for the US$712m capex due in 2H10 relating to the purchase of four containerships to be chartered to Maersk. RMT also has a US$130m loan facility due in Apr 10. While our fair price for RMT is 43% above its current share price, we maintain our HOLD call.
RMT is trading at a very low FY09 P/B of 0.31x. Should the trust overcome its financial hurdles by refinancing the US$130m loan, and by securing funding for its newbuilds, we expect a re-rating. At this juncture, the management is still seeking solutions to its financial hurdles.
FSL – DBS
Positioning for growth
• Placement to raise proceeds of about US$29m, comes on the heels of successful negotiation of two year covenant waiver on existing borrowings
• 3Q09 DPU guidance of 1.50UScts maintained, dilution thereafter, if any, limited to 7% at worst
• DPU accretive acquisitions could be on the radar, maintain BUY with target price S$0.70
Placement fortifies balance sheet… FSL Trust has successfully placed out 80m new units at an issue price of S$0.525 per unit, raising S$41m (US$29m) in net proceeds. This latest development follows an earlier DPU cut and a recent two-year waiver on its loan-to-value covenants; and puts the Trust firmly on the road towards a less aggressive and more sustainable business model.
…and adds acquisition angle. Apart from reducing gearing and satisfying the more stringent covenant requirements on the Trust’s minimum equity level following the recent waiver negotiations, the placement provides a growth option to demonstrate the continued viability of the business model. The proceeds should enable the Trust to enter up to 2 small sized sale and leaseback deals and amidst the current shipping downturn, the Trust is looking at opportunistic deals promising more than 15% asset yield.
Manager keeps guidance intact. While 3Q09 DPU guidance has been reconfirmed at 1.50UScts, we believe that the Trust should be able to distribute a minimum of 1.40UScts on the expanded share base, going forward, without accounting for acquisitions. This implies a mere 7% dilution and brings FY10 yield down to 13.1% from 14.0% pre-placement, which is still attractive given the embedded growth option. Acquisitions, even at a conservative 12% asset yield, could potentially boost DPU by another 9% in FY10. Thus, we maintain BUY, TP slightly reduced to S$0.70 owing to near term dilution effects.
FSL – UOBKH
Yields Are Intact But Bullet Payments Not Too Far Away
First Ship lease Trust (FSLT) has raised S$42.0m (US$29.2m) via a private placement of 80m new units (15% of pre-placement share capital) at an issue price of S$0.525/share to fund acquisitions. The shipping trust has also secured a two-year waiver for its loan-to-value (LTV) covenant and reaffirms quarterly
payout of 1.5 US cents from 3Q09 onwards.
Management targets gross asset yield of 15 p.a. Based on the placement price of S$0.525/share, we estimate the cost of equity at 16.5%, which appears high. However, the management targets a gross asset yield of 15% p.a. While it is difficult to estimate the effect of FSLT’s proposed vessel acquisitions, shipping trusts generally do not undertake acquisitions that are non-accretive.
Waiver of LTV covenant is a positive development for FSLT as it eliminates the risk of breaching its LTV covenant, given the fall in ship values. Over the two-year waiver period, FSLT will make quarterly repayment of US$8.0m.
However, balloon payments are not too far away. While FSLT has begun to repay part of its loans on a quarterly basis, it still has a total outstanding loan balance of about US$400m due for balloon payments in 2012 and 2014. It will either have to refinance the debt or raise equity for the bullet payments. The latter would likely result in a yield dilution. Based on a hypothetical scenario, if FSLT were to raise US$400m at today’s share price of S$0.61, this would imply a mere yield of 5.6% p.a. (before accretive acquisitions).
Maintain HOLD and cut our fair price from S$0.64 to S$0.62 in view of the dilution from an enlarged share capital. Our fair price is based on 0.8x 2010 P/B of the container shipping sector. We suggest entry price at S$0.56.
FSL – BT
First Ship Lease Trust to raise funds from placement
JUST days after winning some reprieve from its bankers, First Ship Lease Trust (FSLT) is now seeking to raise more funds with a 100 million unit placement exercise.
The placement, to be arranged by CLSA Singapore, will not be underwritten. The issue price per new unit and number of new units to be issued will be determined by CLSA in consultation with the trustee-manager, FSL Trust Management (FSLTM), following a book-building process.
FSLTM said that the issue price will be between 52.5 cents and 57.5 cents unless otherwise agreed between CLSA and FSLTM but provided that it will not be at a discount of more than 20 per cent to the traded volume-weighted average price of 59 cents on the day before the agreement was signed.
The trustee-manager said that assuming that all the 100 million new units are issued at an assumed price of 59 cents each, FLST estimates that it will receive net proceeds of about $57.3 million.
The trust plans to use funds raised for the acquisitions of vessels with leases or of companies holding such vessels, although it has not identified any specific assets to be acquired as yet.
The new units are equivalent to about 19.28 per cent of the existing issued units and about 16.16 per cent of the enlarged issued units, assuming that all the 100 million new units are issued.
To ensure fairness to existing unit holders, FSLT will give a stub distribution, estimated at 1.27 cents, for the period July 1 to the day immediately preceding the date on which the new units will be issued instead of to Sept 30 as originally scheduled. The new units are expected to be issued on Sept 17, said FSLTM, adding that the next distribution following the stub distribution is expected to be for the period from the issue of the new units to Sept 30.