Lower risk, higher returns

• Counterparty risks waning, no big refinancing risks before 2012
• Healthy uptake of units in distribution reinvestment scheme signals investor faith in management
• Valuations look more compelling than peers
• Upgrade to BUY, TP revised up to S$0.71

Risks look more manageable now. FSLT has a more diversified fleet than peers – with about 38% exposure to containers and 65% to tankers (oil, chemical, product). With the oil price in recovery mode, counterparty risk is reduced as well. Berlian Laju Tankers, one of its more vulnerable clients, should be able to tackle its balance sheet difficulties with recent bond and rights offerings. Moreover, FSLT has no big refinancing risks before 2012.

Conservative approach seems to be working. Though the sponsor and key management lent only about 9% support to the 1Q09 Distribution Re-investment Scheme (“DRS”), the uptake rate of 30.9% announced recently was surprisingly high – and seems to vindicate the management’s prudent approach to cash distributions. FSLT will now issue about 15.6m new shares and save US$3.8m in cash. With a dividend cut earlier and the DRS now, FSLT is looking to prepay borrowings and build a better negotiating platform with lenders, should the need arise.

DPU guidance inspires confidence. As such, given the lack of near-term concerns, we believe there is better visibility to FSLT’s dividend payouts, but it is still trading at yields of about 25% – higher than other shipping trusts. Management has also re-affirmed 2Q09 DPU guidance of 2.45UScts. This is despite the higher number of units, indicating that the DRS scheme may not be dilutive in the near-term. Hence, we upgrade the stock to BUY; and our DDM-based TP is revised up to S$0.71.

31% opt for new units in place of cash: FSL Trust

FSL Trust Management Pte Ltd (FSLTM), the trustee-manager of First Ship Lease Trust (FSL Trust), yesterday said its distribution reinvestment scheme (DRS) has received stronger than expected support from unitholders. It also affirmed its distribution forecast for the current quarter.

Unitholders holding 155,540,770 units or 30.9 per cent of the total number of issued FSL Trust units elected to receive their distributions in the form of new units in lieu of 2.45 US cents per unit in cash. Accordingly, FSLTM has issued 15.6 million new units and the units have been credited into the CDP securities account of these unitholders on May 29, 2009.

FSL Trust’s sponsor FSLTM and the respective board directors also opted for new units in respect for all or part of their unitholdings.

FSLTM chief executive Philip Clausius said: ‘The participation level in the DRS was much stronger than we expected and we are certainly very pleased with the outcome. That so many unitholders chose to receive their distribution in new units is a testament of their confidence in the stability and long-term prospects of FSL Trust.’

With the scheme, a total of US$3.8 million has been retained and this will go mainly to voluntary debt repayment.

FSLTM reaffirmed its distribution per unit (DPU) guidance of 2.45 US cents for the quarter ending June 30, 2009. This represents about 75 per cent of the projected distributable cash flow. The residual cash from the distributable cash flow, together with the US$3.8 million retained under the DRS, will be applied towards a voluntary loan prepayment of US$8 million on the next interest reset date.

All of FSL Trust’s eight lessees have been making full and prompt advance payment of their monthly lease rentals, including those for June 2009. ‘FSL Trust has no committed capital expenditure and no immediate need for substantial capital raising to support its current lease portfolio,’ it said.

Reinvestment scheme in play for 1Q09 distributions

Results in line. FSL Trust (FSLT) posted US$24.8m in revenue, down 3.3% QoQ and up 49.5% YoY thanks to acquisitions made over the course of 2008. Note that, as previously guided, this is the first quarter where FSLT will not distribute 100% of cash earnings. Instead, the trust will distribute about 73% of cash earnings, or 2.45 US cents per unit, down 5.4% YoY and 20.4% QoQ because of the lower payout. The results were in line with our expectations. The trust guided for a 2Q09 DPU of 2.45 US cents as well.

Voluntarily prepaying loans. FSLT used US$4m of the retained US$4.6m to voluntary prepay loans. We have noted previously that shipping trusts have to re-align their debt tolerance and business model in light of a ‘new world order’ of falling asset values and low lender risk appetite. FSLT’s decision to voluntarily reduce its payout ratio is in that vein – a preemptive gesture of good faith to lenders. FSLT is geared at a still high 1.38x debtto- equity. A US$4m per quarter prepayment is a small number compared to the absolute US$509m outstanding loan amount. This is a gesture – not a game-changer, in our view.

Reinvestment scheme in play. The distribution reinvestment scheme (DRS) will apply in 1Q09, giving unitholders the option to receive 1Q09 distributions in units instead of cash. Any proceeds from the DRS (that is, the saved cash earnings) will also be used to prepay loans. This scheme is an attempt to balance the needs of investors demanding cash yield against concerns of sustainability and gearing. But it is unclear just how many investors will voluntarily “do the right thing” for the trust and elect to receive units instead of cash. The success of the scheme in 1Q09 may significantly affect FSLT’s course of action going forward – if the DRS fails and market conditions persist, FSLT may ultimately have to cut the distribution payout further, effectively making the “right” choice for unitholders.

Valuation. FSLT has a diversified portfolio with exposure to different shipping sub-sectors, and with no charterer contributing more than 20% of annual revenue. Our key concern is counterparty performance and any resulting disruption of cash flows. The current share price is quite clearly pricing in a distressed scenario, in our opinion. However, we would prefer to wait
until the shipping industry shows concrete signs of stabilizing before we turn buyers. Our fair value estimate is S$0.45 (previously under review).
Maintain HOLD.

Steady going for now

No major surprises from FSLT in 1Q09. As per guidance, FSLT announced a DPU of 2.45 UScts, which amounts to a payout ratio of 73%. While this is lower than DPU of 3.08 UScts in 4Q08 (100% payout), actual operating cash generation in 1Q09 of US$16.9m was better than 4Q08 cash generation of US$15.4m, highlighting that the business model is still holding up well. The residual cash was utilized to prepay US$4m of loans. Meanwhile, the DIstribution Reinvestment Scheme will apply for 1Q09, and unitholders may choose to receive part or all of their distributions in the form of new units. Any reinvested income will again largely be used for loan prepayments.

Maintain HOLD, TP revised to S$0.48. Results look solid enough. While revenue was down slightly (3%) q-o-q to US$24.8m, lower interest expenses meant that net profit was up from US$0.5m in 4Q08 to US$1.5m in 1Q09. EBITDA margin also came in at a healthy 93.3%.

And FSLT keeps lenders happy. Of the US$16.9m cash generated, DPU payout amounted to US$12.3m and the residual cash of US$4.6m was used towards a voluntary loan prepayment of US$4m in 1Q09. We view this move as positive, as it signals strong cash position to lenders and enables FSLT to negotiate better terms, in case any loan covenants are breached going forward.

But we stay cautious for now. Management updated that all 8 lessees have been making full and prompt payments and no renegotiation attempts have been made till now. For 2Q09, the DPU guidance was maintained at 2.45 UScts. However, we still lack visibility about charterers’ finances, and CSAV’s recent restructuring efforts show that ship operators are not out of the woods yet. As such, we retain our HOLD call, while our DDM-based TP is revised down to S$0.48.

FSL Trust to give DPU of 2.45 US cents for Q1

Firm doing well with stable cash flows from lease portfolio

FIRST Ship Lease Trust (FSL Trust) will distribute US$12.3 million or a distribution per unit (DPU) of 2.45 US cents to its unitholders for the first quarter ended March 31, 2009, FSL Trust Management Pte Ltd (FSLTM), the trustee-manager, said yesterday.

The DPU of 2.45 US cents represents a payout of approximately 73 per cent of the total distributable cash flow for the quarter.

This is lower than the DPU of 3.08 US cents in Q408 and 2.59 US cents in Q108, which were based on a 100 per cent payout ratio.

The cash retained in Q109 has been primarily applied towards a voluntary loan prepayment of US$4.0 million, it said.

The distribution re-investment scheme (DRS) will apply for the Q109 distribution.

Eligible unitholders will thus have the option to receive their distributions in the form of new units, cash, or a combination of both.

Philip Clausius, chief executive officer of FSLTM, said: ‘Whilst the global shipping and capital market conditions remain challenging, FSL Trust’s business continues to perform well with stable cash flows from the lease portfolio.’

‘We have started to prepay some debt voluntarily, as a signal to our lenders, and as reaffirmation of our commitment to be proactive and prudent in our capital management.

‘ The board has decided to apply the DRS this quarter in order to increase its scope of voluntary debt repayment.’

Of the total revolving credit facilities of US$515 million secured by FSL Trust, US$513 million have been utilised to acquire the additional 10 vessels post IPO.

FSLTM made a voluntary prepayment of US$4.0 million in Q109, which reduced the outstanding loan amount to US$509 million.

The loans are fully secured on all of FSL Trust’s vessels. The facilities are provided on a floating rate basis.

FSL Trust said it has hedged its interest rate risk through natural hedges or interest rate swaps to fix the interest rates until the maturities of the facilities.

All vessels in FSL Trust’s lease portfolio are fully financed and there is no committed capital expenditure that requires additional funding.

It said it does not have any loan refinancing needs until 2012. FSL Trust is also in compliance with all of its covenants under the credit facilities with its lenders.

It added that there is no immediate need to raise substantial capital.

For Q209, the trustee-manager is providing a DPU guidance of 2.45 US cents, which represents approximately 75 per cent of the projected distributable cash flow.

The cash retained, together with any proceeds from unitholders who have elected to receive their Q109 distributions in units under the DRS, will be principally used to reduce the outstanding loan balance.

FSL Trust units closed up two cents at 43 cents yesterday.