Category: PST
Shipping Trusts – OCBC
Time to stop hoping for the best
Industry continues to struggle. The container shipping industry faces a major supply-demand imbalance. According to AXS Alphaliner, outstanding orders for new ships account for about 47.6% of the existing fleet. This translates to a 12.9% per annum growth in the world fleet over the next three years. With the global recession dampening demand, especially the US consumption story, we expect tough times ahead for the container industry. Major operators, including shipping trust customers, have announced lay ups, vessel redeliveries, and plans to attempt to delay order deliveries. About 1.1m TEUs, or 8% of the world’s total container fleet, is currently idle. This broader reality can have a major impact on the trusts’ cash flows – and consequently, on distributions to unitholders. Charterer performance will be key in the coming months – if economic conditions continue to deteriorate, we could see charterers approaching the trust to renegotiate leases.
Passively waiting out the storm. US-listed comparable, Danaos Corp [NOT RATED], announced that it was suspending dividend payments to divert cash towards funding its new-building program. It also delayed some deliveries. Back in Singapore, Rickmers Maritime (RMT) is contracted to acquire US$988m worth of containerships over the next two years, with partial debt funding currently in place. The manager has so far only said that it “is exploring all options” to finance its order book but this is not enough. The market needs more clarity on what RMT will do and whether it will (or can) follow the Danaos route of delaying deliveries or cutting dividends. Unlike RMT, FSL Trust (FSLT) and Pacific Shipping Trust (PST) have no committed orders. Meanwhile, FSLT will retain about 20-25% of cash income in 1Q09 (versus a 100% distribution payout previously) to prepay debt as a pre-emptive “good faith” gesture to lenders eyeing debt covenants. We believe there is room for FSLT to lower payout further to a point where both unitholders and lenders are satisfied. In comparison, PST is only paying out about 50% of cash income. An explicit debt repayment plan would also demonstrate FSLT’s commitment to sustainability, in our view.
Still NEUTRAL on sector. While the STI is down 4% YTD, Singaporelisted shipping trusts are down 10% for the year. On average, the sector is trading at a 66% discount to NAV but we are not quite ready to call this a “value” opportunity. In our opinion, a re-rating of the sector depends on 1) signs of an improving external environment and 2) the trusts taking more aggressive action to remedy some fundamental concerns.
PST – OCBC
4Q results par for the course
Acquisitions buoy revenue. Pacific Shipping Trust (PST) posted US$14.5m in 4Q08 revenue, up 67% YoY and 30% QoQ. For the full year, it recorded a 29% increase in revenue to US$44.6m. The strong gains were due to contributions from the four vessel acquisitions made over the course of 2008. The trust recorded a net profit of US$6.3m for the quarter. Because of a change in the accounting treatment, PST will no longer reflect fair value gains and losses on its interest rate swaps on its P&L statements. Stripping out the same from 4Q07 accounts, the trust saw roughly a 53% YoY gain in net profit. The results met our expectations.
DPU is lower. PST will pay unitholders 0.93 US cent per unit in distributions for the quarter, which translates to a 25% annualized trailing yield. Despite gains in cash income, this DPU figure is about 15% lower on a YoY and QoQ basis because of: 1) the lower payout policy adopted in 2008; 2) an enlarged shareholder base after the 3Q08 preferential offering; and 3) a partial revenue contribution from the CSAV Lauca, the fourth acquisition completed only in mid-November. We estimate a slight increase in 1Q09 DPU, which marks the first full contribution from CSAV Lauca. At the same time, PST’s interest expenses will decrease in sync with the trust’s debt repayment schedule. This should also boost DPU on a more gradual basis.
Stronger balance sheet. PST is in a comfortable position since the completion of its 3Q08 preferential offering, which raised about US$92.3m. The proceeds were used to partially fund the 2008 vessel acquisitions. PST is currently geared at about 1x debt-to-equity. We expect this to fall to about 0.94x by the end of this year as the trust pays down debt. PST can also sit tight as it has no refinancing needs in the near to medium term. PST also stands out because it is the only Singapore-listed shipping trust without loan-to-market value covenants on its books.
HOLD recommendation. Our key concern for PST is counterparty risk arising from the trust’s two customers, Pacific Intl Lines (PIL) and CSAV. Both charterers are among the world’s top 20 container operators1 . PIL, which accounts for about 70% of PST’s annual revenue, is the trust’s sponsor and 59.2% stakeholder. Tactically, we think it is too early in the cycle to become buyers of shipping trusts. There are still too many unknowns. We rate PST as a HOLD with US$0.16 fair value.
PST – BT
Pacific Shipping Trust delaying acquisitions
PACIFIC Shipping Trust (PST) will delay acquisitions until the shipping market stabilises, but expects to capitalise on opportunities as vessel prices drop.
‘We see some downside risks in first-half 2009. Until the market stabilises we are not looking at capital commitment or acquisitions,’ Alvin Cheng, CEO of PST Management, told BT, saying acquisitions could be 12-18 months away.
Still, Mr Cheng is confident that ‘opportunities’ will arise, resulting in an ‘attractive return on investment’ as asset prices fall.
PST is paying distribution per unit (DPU) of 0.93 US cents for Q4 2008 ended Dec 31. This is 15 per cent lower than in Q4 2007, largely due to 10 per cent retention of the distributable amount and the timing difference between the receipt of funds from a preferential offer in September last year and the earning of income from new vessels. Part of the US$92.3 million raised through the offer was used to finance vessel acquisition.
Total distributable income for Q4 2008 increased 68 per cent to US$6.27 million, while net profit came in at US$6.35 million, up from US$1.65 million previously.
Gross revenue surged 67 per cent to US$14.5 million, due to the contribution from four vessels delivered during the year. A full quarter’s contribution came from the new vessel CSAV Laja, while 50 days’ time-charter income was attributable to CSAV Lauca. Both have been chartered to Compania Sud Americana de Vapores on fixed rates for five-year periods.
For FY 2008, PST’s net profit was up 75 per cent to US$18.3 million, while distributable income increased 28 per cent to US$18.5 million. Gross revenue grew 29 per cent to US$44.6 million.
PST is upbeat that it will ride out the downturn and expects revenue for 2009 to increase 38 per cent year on year on the back of its four new vessels.
Its fleet of 12 vessels is fully financed with no outstanding capital commitments and no refinancing requirements in the medium-term. Its shortest lease expires in 2013.
DPU for Q4 2008 will be paid on Feb 27.
PST – OCBC
Rights issue over and done with
Preferential offering completed in 3Q. Pacific Shipping Trust (PST) raised about US$92.3m in gross proceeds from its preferential offering (PO) in 3Q08. The offering was on the basis of three new units for every four existing units. The issue price of 36.5 US cents per new unit was at an 18.9% discount to PST’s IPO price of 45 US cents. Sponsor Pacific International Lines (PIL) had agreed to subscribe for both its pro-rated shares as well as any unsubscribed units. Approximately 57.2% of the new units were unsubscribed, and PIL has subsequently seen its stake in PST increase from 34.64% to 59.2% after the partial equity “bail-out”.
Stronger balance sheet post PO. The PO proceeds are being used to finance and refinance the four new vessels costing US$222.2m slated for acquisition in 2008: Kota Nabil (delivered in March); Kota Naga (May); CSAV Laja (mid-September); and CSAV Lauca (mid-November). Fully debtfunded, the 2008 acquisitions would have bumped PST’s debt-to-equity up to more than 2x by year end. As of 30 September, PST is geared at 0.8x debt-to-equity. Its portfolio now consists of ten vessels, with a total asset investment of about US$493m. PST has no near-term debt expiry and a conservative loan repayment structure.
No LTV covenant. PST is the only Singapore-listed shipping trust without a loan-to-market value covenant on its loan documents. This means that there is no risk of a technical default because of falling asset values. This puts PST in a better position to ride out the shipping cycle than the other two trusts. While PST has no further capital commitments (unlike Rickmers Maritime), it has not suspended its yearly acquisition target either. The trustee-manager indicated in the 3Q release that they would continue to be on the look-out for “yield-accretive growth opportunities”. In addition, PST has received unitholder approval to expand its investment mandate beyond containerships.
Proxy for PIL. PST is the only shipping trust to have completed an equity issue since listing. This issue has come at the price of a smaller free float but demonstrates the willingness of PST’s sponsor to support its trust. Charters to PIL, a top 20 liner company , account for about 70% of PST’s annual revenue. In essence, the risk quantum for PST has become a proxy for the risk of the parent company. PST’s share price has fallen 68% over 2008. It is currently trading at a 32% trailing yield.
Shipping Trusts – OCBC
Victims of the cycle
More turbulence ahead… The last several years have seen major export growth as well as a commodities boom. This drove a boom in shipping – manifested in both an increase in rates as well as a demand for increased capacity, and led to increased asset prices and the construction of more ships. Asset prices soared at ‘bubble speed’ in the past couple of years, partly because of an aggressive use of leverage. The global economy then turned in early 2008 and the shipping industry was caught with a huge capacity and a large order pipeline. The industry has already seen a sharp reduction in charter rates. Asset values are expected to fall as the cycle corrects. We expect this decline to be steep in line with the deleveraging cycle.
2008 was about growth. Investors and managers of yield instruments in a bull market (rising asset values) and a cheap market (easy credit) were caught in a growth trap. The focus was on who could ramp up leverage and consequently, who could grow the fastest. The three Singapore-listed shipping trusts were all formed at, or very near, the peak of the shipping cycle. Consequently, their ships were priced at high valuations. They then continued to grow aggressively (at those same stratospheric price levels) – the sector has invested some US$1.3b since listing, more than doubling their IPO portfolio, in a space of less than two years. This growth was achieved through an aggressive use of leverage.
2009 is about survival. We believe valuations in 2009 will be driven by the health and strength of the three trusts, with the main focus on survival. Technically, shipping trusts are structured as long term, cash generating entities that have the ability to ride out short-term cycles. Unfortunately, the sector’s hunger for higher leverage has made them victims of those
same cycles. The biggest threat to the sector is the loan-to-market value (LTV) covenant. An LTV breach, not outside the realm of possibility, triggers a technical default. The ultimate outcome, possibly lower (or zero) distributions or distressed asset sales, depends on the health and risk appetite of the trust’s lenders. Pacific Shipping Trust is the only trust without LTV requirements. We expect capital commitments to be another overhang on valuations in 2009 – Rickmers Maritime has US$1.1b in new vessels coming in from now until 2010. This level of growth, previously a positive, has now become a burden. We have a NEUTRAL rating on the sector.