Asset values edge up versus October

DPU in line. FSL Trust (FSLT)’s 1Q10 DPU of 1.5 US cents was flat QoQ but fell 38.8% YoY because of a lower payout policy and a larger unit base post-placement. Guidance for 2Q10 DPU is flat at 1.5 US cents, offering an annualized yield of 13%. The manager quite emphatically stated it would not return to the days of a 100% payout; it prefers a “fixed dividend + incremental growth” strategy that will allow it to retain some excess cash.

Acquisition plan hits the “homestretch”. FSLT has yet to deploy the US$28.3m net proceeds from its Sep 2009 placement; so for roughly seven months, the larger unit base has not been offset by additional income or lower expenses – creating a shortfall between cash generated and cash paid out. The manager is now saying an announcement is likely in “a matter of weeks / possibly in a month of two”. FSLT reiterated its target asset yield of 15% and its plan to further diversify into a previously untapped vessel sub-sector (for example, offshore). A significant change in guidance is that FSLT is “now hopeful of lifting acquisition projects over and above” the placement proceeds because of increasing access to capital.

Asset values edge up. In a Mar 2010 charter-free revaluation of its portfolio, FSLT recorded a 5.5% gain in asset values versus Oct 2009. The current value-to-loan (VTL) coverage of 129% is comfortably above the current reduced 100% VTL requirement but below the 145% threshold required after end-2Q FY11. Assuming asset values remain stable and taking US$8m quarterly repayments into account, FSLT can touch 140% coverage by Jun 2011. Cash in hand and the planned unencumbered acquisition adds further cushion. Still, FSLT is taking no chances and may opportunistically issue unsecured debt (the manager guided that BB- high yield debt in Asia is attracting pricing of 10-13% at present). The trade-off versus secured debt (costing roughly 6% today) is large, but this may be a necessary evil to remove the VTL covenant overhang, once and for all.

Valuation. We have revised FY10 estimates to reflect an assumed acquisition completion date of 01 Jun (prev: 01 Jan). In light of increased stability in FSLT’s operating environment, we are 1) lowering our discount rate from 13% to 11.5%; and 2) now derive our fair value estimate using a 20% discount to this discounted FCFE value (prev: 25%). But balance sheet issues are not eliminated completely, and we maintain our HOLD rating with revised S$0.59 fair value [prev: S$0.53].

Buy for yield and underlying recovery

At a Glance

• Predictable results again; declares DPU of 1.50UScts for 1Q10, maintains similar guidance for 2Q10

• Provides “charter-free” vessel valuation of US$623m – 24% discount to NBV but well within covenant limits

• Share price re-rating still lagging those of ship operators

• Maintain BUY with TP S$0.78

Comment on Results

There was again no surprise in 1Q10 as far as operational results were concerned. Revenue came in at US$24.4m, stable q-o-q, and the Trust generated net cash of US$16.3m from operations, in line with our estimates. As guided previously, the Trust paid out 1.50UScts as distribution for 1Q10, though they had to depend slightly on cash retained in previous periods to meet the guidance. As in previous quarters, US$8m was earmarked to prepay loans, which should bring outstanding loans to US$477m in April 2010.

Outlook and Recommendation

The Trust also took the opportunity to announce the independent charter-free valuations of its 23 vessel-fleet, which stood at US$623m as of March 2010. This is about 6% higher than a similar valuation of US$590m obtained in October 2009, pointing to a gradual recovery in asset values in line with demand recovery. The “charter-free” valuation, while not fully relevant to FSLT’s business model, represents a 24% discount to the vessels’ NBV of US$821m.

The valuation also represents 129% of current indebtedness of US$484m, well within the revised LTV limit of 100%, which is applicable until 2Q11. Based on the expected indebtedness of US$440m at end-2Q11, the charter-free value required to fulfil the original 145% LTV covenant would be US$638m, or only about 2.5% higher than current valuations. Thus we would not be unduly worried at this stage about the chances of future technical defaults.

Hence, we are maintaining our BUY call on FSLT at a TP of S$0.78 (10% target yield), given the visibility in payouts, possibility of acquisitions in 2H10 and our perception of it being a laggard stock

FSL Trust’s Q1 DPU falls 39% to 1.5 US cents

DPU, down from Q1 2009 2.45 US cents, in line with guidance

FIRST Ship Lease Trust (FSL Trust) saw first-quarter distribution per unit (DPU) plunge 39 per cent to 1.50 US cents from 2.45 US cents in the previous corresponding quarter.

But the DPU, which represents a distribution of US$9 million to unitholders, is in line with the DPU guidance provided previously and represents a payout of 55 per cent of the net cash from operations for the quarter ended March 31. The 1.50 US cent payout is also unchanged from the DPU of the preceding 2009 fourth quarter.

Net cash generated from operations for Q1 FY’10 held steady at US$16.3 million compared with US$16.2 million in the quarter before and is 4 per cent lower compared with US$17 million in Q1 FY’09.

‘FSL Trust’s lease portfolio continues to deliver steady cash flow that underpins the sustainability of regular distribution to unitholders. We continue to be encouraged by the positive signs of a demand recovery in the shipping industry, although the oversupply of new ships continues to be an overhang over the mid-term. Our focus for this year remains on growing and diversifying the portfolio. We believe that asset values in the shipping industry have begun to bottom out, and we see the second half of this year as an exciting period for growth,’ said Philip Clausius, chief executive officer of trustee-manager FSL Trust Management.

The financial performance for Q1 FY’10 was predictably similar to that in the previous four quarters as the number of vessels and lease terms of FSL’s lease portfolio have remained unchanged since October 2008.

Lease revenue in Q1 FY’10 declined marginally by 1.6 per cent to US$24.4 million compared with Q1 FY’09, due primarily to lower lease payments received from two vessels leased to Geden Lines which are pegged to the US$ three-month Libor and reset on a quarterly basis. The US$ three-month Libor has declined between Q1 FY’09 and Q1 FY’10.

Finance expenses for Q1 FY’10 increased 5.6 per cent due to higher interest margin on the outstanding indebtedness, following the credit facility amendment agreement with FSL’s lenders in September.

Commenting on the industry outlook, Mr Clausius said: ‘The shipping industry is not out of the woods yet, but prospects should get better with demand on a recovery path, asset values slowly improving and access to capital becoming more readily available. Against this background we are now making progress in finalising our first acquisition post-crisis. Such acquisition, when consummated, will further diversify our portfolio from a lessee and sector perspective.’

FSL is providing a DPU guidance of 1.50 US cents for the second quarter.