Category: FSL
Shipping Trusts – OCBC
Trust versus Trust
Attractive asset class as a whole. We have BUY ratings on all three shipping trusts – Rickmers Maritime (RMT), Pacific Shipping Trust (PST), and First Ship Lease Trust (FSLT). The asset class as a whole is very attractive – unitholders gain exposure to an attractive sector while sidestepping some of the inherent volatility of the industry thanks to long lease terms and cash flow visibility. The trusts’ shipping income is taxexempt and distributions are also tax-exempt for all investors. All three trusts offer attractive distribution yields of more than 10-12% and potential for DPU accretion.
Payout strategy and asset yields vary. We believe key performance criteria include: 1) asset yields and distribution pay-out strategy, and 2) growth plans and leverage. We estimate that PST’s vessels feature relatively higher asset yields versus the other listed peers. Meanwhile, FSLT is the only trust to distribute 100% of its cash income. Consequently, its DPU consists of a return on unitholders’ investment (net income) and a return of invested principal (depreciation). PST has pegged its debt repayment to its depreciation charge in an effort to preserve NAV. RMT is currently retaining more than 25% of its cash income, which it can utilize for capex. RMT’s future payout strategy has not been explicitly stated.
Big plans for growth. All three trusts plan to aggressively grow through DPU-accretive acquisitions, with RMT growing at the fastest pace and magnitude. PST and FSLT are targeting about US$200 and US$300m in acquisitions yearly. RMT is contracted to acquire US$1.35b worth of vessels over 2008-2010, once approval is finalized in an upcoming EGM. These growth plans are powered through leverage. By the end of this year, we believe the trusts’ debt-to-equity will range from over 1x to 2x. Business trusts have no gearing limit but we believe a sustainable debt-to-equity target is 1x because of the high volatility in vessel values. In our view, the trusts’ growth beyond 1-1.5x can only be sustained by further equity issues. Some of the trusts may have an option to postpone the next issue – for instance, RMT’s debt-to-equity might increase to 3x before the next tranche is raised – but the need for fresh equity is inevitable at this pace.
Our top pick is PST. The reengineering of PST’s debt model over 2008 presents a one-time opportunity of sharply increasing DPU through accretion from leverage and a higher payout strategy.
Source : OCBC Securities
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.
FSL – BT
First Ship Lease Trust’s US$12.1m Q4 distribution beats IPO forecast
FIRST Ship Lease Trust (FSLT) is to distribute US$12.1 million to unit-holders for the fourth quarter ended Dec 31, 2007, 13.6 per cent better than the projection made during its initial public offering (IPO) in March last year.
The Q4 distribution represents 100 per cent of the amount available for distribution. Distribution per unit (DPU) is 2.42 US cents compared with a forecast 2.13, and works out to 9.68 cents on an annualised basis. The Q4 DPU is also 8.5 per cent higher than that for the preceding quarter.
Based on Jan 15’s closing unit price of $1.20 and assuming a Singapore dollar/US dollar exchange rate of $1.431, this translates into a distribution yield of 11.5 per cent.
Revenue for the quarter came up to US$15.2 million, 31.4 per cent higher than the initial projection. The increase in DPU of 0.19 US cent over the preceding Q3 was made possible mainly by incremental cash flow resulting from the purchase and leaseback of two product tankers from Groda Shipping and Transportation in November.
‘We are very pleased with our achievements for the fourth quarter where revenue continued to grow compared to the preceding quarter and was significantly higher than what we projected at IPO,’ said Philip Clausius, chief executive of FSLT’s trust-manager FSL Trust Management.
FSLT had an initial portfolio of 13 vessels at listing. This has expanded to 18 vessels as at Dec 31, 2007, comprising four containerships, nine product tankers, three chemical tankers and two dry bulk carriers.
The trust aims to continue pursuing acquisition opportunities as part of its growth strategy but FSLT’s revenue base is still quite dependent on container ships and product tankers. It is, however, working to better diversify its portfolio, said chief financial officer Cheong Chee Tham.
It is on track to accomplish its IPO target of US$200 million asset acquisitions within 12 months of its listing date and has raised the target to US$300 million for financial year 2008. So far, US$158 million worth of vessels which are subject to long-term leases have been acquired.
FSLT’s books closure date is Jan 24 and payout will be made on Feb 22. The trust closed two cents lower at $1.18 yesterday.
FSL – UOBKH
FY07: DPU in line with expectations
First Ship Lease Trust (FSLT) has announced its FY07 results. Earnings came in at US$6.3m, 17.9% below our calculations mainly due to differences in calculation of depreciation (unlike the other shipping trusts, FSLT has a depreciation policy based on cost vs estimated residual in the 20th year) and amortization of debt upfront fees. Overall distributions per unit (DPU) announced for the period came in at 6.95 US cents, 2.1% below our estimated DPU for the year but spot on with management’s guidance following their Nov 2007 acquisition of 2x 47,000DWT product tankers.
Quarterly DPU to be made on 22 Feb 2008
FSLT will be paying out a distribution of 2.42 US cents for 4Q07 which is in line with management’s guidance, following the acquisition of 2x 47,000DWT product tankers in Nov 2007 and 13.6% above the projected distribution at IPO. Investors are advised to take note of the following dates:
• 22 Jan 2008: Ex-distribution date
• 24 Jan 2008: Books closure date
• 11 Feb 2008: Deadline for unitholders to complete and return the Distribution Election Notice to CDP in order to receive distributions in US dollars
• 22 Feb 2008: Payment of distributions.
Appointment of US Investor Relations
FSLT has announced that it has retained the IGB Group as its US investor relations and financial communications agency in order to increase its visibility among US based investors and financial media. We view this as a positive for FSLT as US investors have a greater appreciation for shipping trusts. Seaspan and Danaos, the two shipping trusts in the US originally started out like the shipping trusts in Singapore, trading at a DPU yield of between 8.5-9.0% at listing. Continued accretive acquisitions lead to a re-rating of the sector resulting in yield compression to between 5.5-6.0%. Currently the US shipping trusts are trading at a DPU yield of between 7.5-7.9%, much lower than FSLT’s current 12.6%.
Stable and visible distributions: Maintain BUY
We continue to like FSLT for its stable and visible distributions which are supported by its long term timecharters of between five to eleven years. Among the three shipping trusts, FSLT currently also has the lowest debt to equity ratio of 0.34x. As FSLT has a target long-term debt-to-equity ratio of 1x, we expect future acquisitions to continue to be highly accretive as they can be funded by lower cost debt. We maintain our BUY recommendation on FSLT and maintain our target price of US$1.22 (S$1.76).
Shipping Trusts – UOBKH
Compelling yield plays for 2008
With uncertainties over the impact of the US economic slowdown on the rest of the world, we advocate taking some position in high yield, defensive earnings stocks. We see value in Singapore shipping trusts, namely First Ship Lease Trust (FSLT), Pacific Shipping Trust (PST) and Rickmers Maritime (RMT). They offer earnings visibility and steady high distribution yields of between 10.2%-12.7%. All three Singapore shipping trusts also continue to trade at a discount to their RNAV and DCF valuations. As such we reiterate our OVERWEIGHT recommendation for the sector.
FSLT. Among the three shipping trusts, FSLT currently has the lowest debt-to equity ratio of 0.38x. The trust has a target long-term debt-to-equity ratio of 1x. As such, future ship acquisitions can be funded by low-cost debt, leading to high yield accretion to unitholders. In Nov 07, FSLT acquired two 47,000DWT product tankers for US$113m. This acquisition had a relatively high asset yield of approximately 12.5% and boosted FSLT’s expected FY08 DPU by 17% from 8.92 US cents to 10.43 US cents. Assuming FSLT’s remaining debt capacity (based on a maximum forecast FY08 debt-to-equity ratio of 1x) to be utilised for ship acquisitions at similar asset yield, the trust could potentially increase its DPU by an additional 3.34 US cents, implying a potential DPU yield of 16.8%. We maintain our BUY recommendation on FSLT with a target price of US$1.22 (S$1.76).
PST. Debt restructuring is PST trump card. Of the three trusts, PST has the most conservative debt repayment structure (straight-line over 10-12 years from IPO as compared to its initial fleet’s remaining economic lifespan of about 26 years). We do not discount the possibility of debt restructuring though PST’s management has no plan to do so currently. PST is currently trading at a FY08 DPU yield of 10.2%. We maintain our BUY recommendation on PST with a target price of US$0.50.
RMT. RMT’s share price fell by 18.9% in the last two months. We have discussed with management this unusual share price weakness that has been specific to RMT and not experienced by the other two shipping trusts. We attribute RMT’s recent share price weakness mainly to selling by some institutional shareholders to raise cash in times of uncertainty. For instance, one of RMT’s cornerstone investors, Fidelity Investments Management has decreased its shareholdings in RMT from 12.97% to 11.6% between early to late-Dec 07.
At RMT’s current share price, it is trading at a FY08 DCPU (distributable cash per unit) yield of 13.7%, the highest among the three shipping trusts and a FY08 DPU yield of 10.7%. Unlike the other two trusts, RMT has a more conservative stance of retaining 25% of its distributable cash for reinvestment whereas the other two trusts pay out 90-100% their distributable cash. RMT is also the most competitive among the shipping trusts in terms of trustee fees and this bodes well for long-term investors. We maintain our BUY recommendation on RMT with a target price of US$1.19 (S$1.72).