FSLT’s bold move to woo US investors

WITH shipping trusts caught between the devil and the deep blue sea trying to boost volume while fighting investor ignorance, First Ship Lease Trust (FSLT) has embarked on a brave overseas foray to quote American Depository Receipts (ADRs) on the US-based International OTCQX trading platform in a bid to raise interest and unit price.

It’s a bold move and – should it prove successful – one that may be emulated by the other two shipping trusts wallowing on the Singapore Exchange (SGX). The theory is that exposure to the more mature US market will improve liquidity and expand the base of unitholders over the long term, according to trustee-manager FSL Trust Management’s president and CEO Philip Clausius.

FSLT certainly needs help. The trust has never regained its IPO price of 98 US cents or about $1.50 at the prevailing exchange rate. It hit a low of $1 in January and is now languishing around $1.10. There is a large dividend yield gap – that is, its units are underpriced – between FSLT (13-14 per cent yield) and US peers such as Seaspan Corp and Danaos Corp (7-8 per cent yield), which the trust hopes to close as more investors take up its units.

‘US investors tend to have a better understanding of shipping stocks due to a critical mass of shipping companies listed there,’ UOB KayHian Research said in a note last week.

While maintaining that FSLT has no regrets about choosing to list on SGX, senior vice-president and CFO Cheong Chee Tham hopes to appeal to this better knowledge of US investors through the ADR quotation.

He is keen to reach out especially to institutional and boutique investors who, due to their mandates, may not have been able to invest directly in FSLT units on SGX. ‘By doing this ADR programme, we are exposing the company to this particular group of investors or others who may not have heard of us,’ he said.

Both analysts and FSLT stress that it’s important to get a critical mass of investors interested in shipping trusts for the sector to take off. And Mr Cheong certainly hopes the US move will jumpstart this process. It is hoped that with greater coverage, more shipping trusts will choose to list on SGX.

But this may be too simplistic. Both Seaspan and Danaos have market capitalisations of more than US$1 billion, which dwarfs FSLT’s $550 million. And whether notoriously parochial US investors take notice of a small Asian-listed shipping trust is debatable.

Asian investors have not been impressed so far. ‘Liquidity for the trusts is not there. If it’s a down-cycle, why do you want to be in shipping and if up-cycle, then you should be in something more leveraged,’ said an analyst.

The few research houses that cover the trust, such as DBS Research and UOB KayHian, have ‘buy’ calls with target prices of $1.65 and $1.61 respectively. But others point to the chicken-and-egg factors of lack of choice and liquidity for staying away. These were the same reasons given for the laggard performance of real estate investment trusts when they were first listed back in 2002. Yet over the past six years or so, they have taken off and are seen as a viable investment option.

Perhaps shipping trusts will slowly gain popularity in the same way. But more may need to be done to nudge the process along. Actively reaching out to foreign companies may be one idea. For example, Lloyd’s List reported that Indian shipping companies will need as much as US$18 billion by 2012 for fleet replacement and will need to find ways to raise cash. These companies could be encouraged to come here to set up shipping trusts to raise funds.

FSL to grow assets by US$300-350m a year, says CFO

SINGAPORE’S First Ship Lease Trust (FSL) yesterday said that it aims to buy up to US$350 million worth of vessels a year and that borrowing costs remain reasonable despite the credit crunch.

This could double its portfolio within several years, as FSL aims to tap growing global trade and a trend of shipping firms leasing a larger portion of their fleet.

‘Going forward, we are looking at US$300 to US$350 million on an annual basis to grow our portfolio,’ chief financial officer Cheong Chee Tham told Reuters in an interview.

Borrowing costs remain ‘reasonable’ at around Libor (London Interbank Offered Rate) plus 120 basis points compared with Libor plus 100 basis points about a year ago, he added.

FSL, which leases liquid tankers, container ships and dry bulk carriers to firms such as Taiwan’s Yang Ming and Russia’s Rosneft, has acquired US$280 million worth of assets so far this year to boost earnings and revenue.

For the second quarter ended June 30, the trust’s revenue rose 71 per cent to US$20.7 million from a year ago while distribution to unitholders increased 28 per cent to 2.8 US cents a share.

FSL expects to pay a third quarter distribution of 3.05 US cents, Mr Cheong said, adding that the payout will remain at 100 per cent of surplus cash flow in the foreseeable future.

Mr Cheong said that the trust favoured smaller ships as these were easier to sell in the second-hand market or lease out once the original leases expired.

He said that he expects shipping firms to lease a larger proportion of their fleet to reduce capital expenditure and free up funds for other operations.

‘In terms of shipping, operating leasing is still relatively less mature than for aircraft,’ he said, noting that just 10-15 per cent of the total financing market for ships involved leases compared with 40-50 per cent for commercial aircraft.

He also said that FSL will likely borrow to pay for new acquisitions, or ask its main shareholder, First Ship Lease, to buy and ‘warehouse’ the ships on its behalf until conditions in equity markets improve.

FSL has a fleet of 22 vessels with another on the way once financing is completed.

The trust had a net book value of US$938 million as at end-June.

FSL and the other two Singapore-listed shipping trusts, Rickmers Maritime and Pacific Shipping Trust , currently trade at distribution yields of around 11 per cent compared with about 7 per cent for US-listed ship financiers such as Seaspan.

They offer higher yields than Singapore-listed real estate investment trusts (Reits), which currently yield around 5-6 per cent, because ships typically have a lifespan of 25-30 years.

Shares of FSL closed at $1.28, down 1.5 per cent after paring earlier losses.

The trust has gained around 8 per cent since the start of the year, beating the benchmark index’s 16 per cent fall. — Reuters

Acquisitions bump up 2Q

Strong 2Q, as expected. First Ship Lease Trust (FSLT) posted a strong set of 2Q results, largely in line with our estimates. The trust saw strong gains in 2Q revenue, up 63.1% YoY1 and 24.4% QoQ to US$20.7m. Net profit came in at US$1.99m, above our estimates due to a lower than estimated depreciation charge and the inclusion of exchange gains worth US$775k. The trust posted a distributable income (net profit plus noncash charges) of US$14m, in line with our expectations. FSLT will pay out 2.8 US cents for the quarter, up 22% YoY and 8% QoQ.

Acquisitions were the kicker. The strong gain in earnings was driven by the acquisition and delivery of four vessels worth US$280m over 2Q. The full impact of these four vessels on the trust’s earnings will be felt in 3Q, and we consequently expect next quarter’s DPU to rise by about 5%. Meanwhile, a fifth vessel costing FSLT US$70m will be delivered in 4Q – the trust is still in the midst of securing financing for the deal. If the acquisition is successfully completed, it will bump up earnings in 4Q and 1Q (full impact).

Debt-to-equity has hit self-imposed 1x target. The aggressive spate of acquisitions also means that FSLT’s debt-to-equity level has shot up from 0.36x last quarter to 1x in 2Q, and will further increase with the fifth vessel buy. Its current debt is on bullet repayment terms. More debt-funded buys on current equity levels may not be as DPU accretive as seen previously as lenders may now require the new debt to be on immediately amortizing terms or at a higher cost of debt. Meanwhile, an equity infusion to continue growing DPU could be dilutive as FSLT continues to trade at prohibitively high yields.

High DPU yield due to aggressive payout strategy. Unlike the other SGX-listed shipping trusts, FSLT does not retain any cash to replenish depreciating assets or to pay down debt. So the distribution paid out consists of both a return on asset and a fair compensation for the loss in value of the unit-holders’ invested capital. FSLT also pays out the depreciation on its leveraged assets. This is similar to the return of unitholders’ capital, except that FSLT is paying out the loss in value of debt-funded assets to unit-holders. This boosts payout in the earlier years, but ultimately debtors will have to be repaid the full principal amount. Maintain HOLD and S$1.20 fair value estimate.

FSL Trust payout up 21.8% in Q2 to US$14m

Distribution per unit goes up 27.9% to 2.8 US cents as revenue rises 71.2%

FIRST Ship Lease Trust (FSL Trust), which provides leasing services to the international shipping industry, is distributing US$14 million to unit-holders for the second quarter ended June 30, a year-on-year rise of 21.8 per cent.

This translates to distribution per unit (DPU) of 2.8 US cents, a surge of 27.9 per cent from the previous corresponding quarter’s 2.19 US cents. Compared with the preceding first quarter’s 2.59 US cents, the increase is 8.1 per cent.

‘For the leasing environment, the transaction flows are still very strong,’ said Cheong Chee Tham, chief financial officer of FSL Trust Management (FSLTM), the trustee-manager of FSL Trust. As a result of ‘the credit crunch, banks are reluctant to lend money freely to ship operators, who look for alternative financing. So we see new enquiries coming in all the time’.

Revenue for the quarter surged 71.2 per cent to US$20.67 million from the year-ago period’s US$12.1 million. This came largely on the back of the acquisitions and leasebacks of six vessels – two product tankers from Groda Shipping & Transportation, two crude oil tankers from Geden Lines and two container ships from Yang Ming Marine Transport Corporation – after June 30 last year. Increased revenue resulted in US$14.2 million in net distributable amount, of which US$239,000 was payable as an incentive fee to the trustee-manager.

The quarter’s distribution translated into annualised DPU of 11.2 US cents, 27.9 per cent higher than the 8.76 US cents for 2Q07. This equals to a distribution yield of 12.3 per cent per year, based on FSL Trust’s closing price of S$1.23 on July 21.

FSL Trust aims to rely on raised capital to grow the trust. ‘We have to keep buying and leasing out vessels,’ said Mr Cheong. This being so, ‘we are keeping an eye on the equity markets as it will affect how we will raise our capital’.

Philip Clausius, chief executive officer of FSLTM, said: ‘The acquisition of the three Yang Ming vessels announced in May will further raise DPU from the next quarter onwards.’

The third container ship from Yang Ming will be acquired in October and will cost US$70 million. FSLTM is currently in talks with the lead arrangers of its recent US$200 million revolving credit facility to raise it to US$265 million.

Once the deal is finalised, FSLTM would have injected US$350 million worth of vessels into FSL Trust, exceeding its initial target of US$300 million for this financial year.

Payment of the distribution of 2.8 US cents per unit will be made on Aug 26. Books close on July 30.