Category: PST
PST – OCBC
Stronger balance sheet post offering
Acquisitions boost 3Q. Pacific Shipping Trust (PST) posted US$11.2m in revenue for 3Q08, up almost 12% QoQ due to the first full quarter contribution from new vessel Kota Naga and 14 days of time charter income from PST’s latest vessel CSAV Laja. Its results were generally in line with our estimates, except for higher than expected time charter expenses due to start-up costs. Income available for distribution rose to US$4.3m, up 3.6% QoQ. The trust will distribute almost 1.10 US cents to unitholders on pre-preferential offering (PO) units.
PO completed in 3Q. PST raised about US$92.3m in gross proceeds from its PO. 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”. Charters to PIL, a top 20 liner company1, 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.
Stronger balance sheet post PO. While we do not like the smaller free float, the benefits of having a strong sponsor and a stronger balance sheet are clearly advantageous in the current climate. 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 (expected in mid- November). Fully debt-funded, the 2008 acquisitions would have bumped PST’s debt-to-equity up to 2.1x by year end. We are now projecting a debt-to-equity level of 0.9x at year end with no near-term debt expiry. PST has a conservative loan repayment structure (which we like) and no capital commitments post 2008. We also like PST as it is the only Singaporelisted shipping trust without a loan-to-market value covenant on its loan documents – so there is no risk of a technical default because of falling asset values.
Downgrade to HOLD. For the reasons discussed above, the risks on PST are potentially lower than its peers – but these still exist. Our focus is on the business risk stemming from the looming global recession and difficult credit conditions: a charter party defaults or charter rate renegotiation and consequent asset devaluation. A shock on the revenue side is especially of concern as PST utilizes about 40% of its cash income on debt repayment. Downgrade to HOLD with 24.5 US cents fair value.
PST – BT
Pacific Ship Trust’s revenue up 29%, DPU flat in Q3
PACIFIC Ship Trust (PST) maintained a steady course in the third quarter, lifting gross revenue 29 per cent to US$11.2 million from US$8.7 million but keeping distribution per unit (DPU) flat at 1.0953 US cents.
The higher gross revenue came on a full quarter’s contribution from the vessel Kota Naga, which was delivered and commenced charter on May 28, and 14 days’ time charter income from the vessel CSAV Laja, which commenced charter on Sept 16.
Net profit after tax rose to US$3.2 million from US$589,000, mainly due to higher revenue and a reduction in fair-value losses on interest rate swaps.
Other expenses – professional and regulatory fees, vessel tonnage tax, advertising and administrative costs – rose US$300,000, related mainly to the acquisition and charter of four new vessels. Finance expenses increased from US$6.4 million to US$7.5 million.
Since the first quarter of FY2008, PST has retained 10 per cent of distributable income for use as working capital. As such, Q3 distributable income was US$3.71 million, almost unchanged from US$3.67 million previously.
DPU for the nine months ended Sept 30 was 3.1553 US cents, slightly lower than 3.19 US cents previously, as distributable income eased to US$10.7 million from US$10.8 million.
‘PST enjoyed a strong Q3 performance despite volatile market conditions,’ said Alvin Cheng, CEO of trustee-manager PST Management. ‘We will endeavour to pursue sustainable returns for unitholders by maintaining a prudent risk management and yield accretive growth strategy.’
PST units closed unchanged at 24.5 US cents yesterday.
Shipping Trusts – DBS
Shipping woes spreading to trusts
Shipping industry concerns bearing down on share prices. Concerns on all three shipping trusts – First Ship Lease, Pacific Shipping Trust and Rickmers Maritime – have been on : (a) stability of revenues, cashflows and DPUs; (b) rising counterparty risks; (c) availability of credit lines; and (d) fast declining asset values.
Revenue sustainability. Leases are locked in. FSLT’s has an average lease term of 9 years with the earliest lease coming up for renewal in 2014. For PST, the average lease term is 7 years, with the earliest coming up for renewal in 2013. In the case of RMT, the average lease term is 7 years, with the earliest lease expiring in 2012.
Counterparty risk is low for now. RMT currently operates twelve container vessels leased out to blue-chip charterers – Italia Maritima, CMA CGM, AP Moeller Maersk, Hanjin Shipping, Mitsui OSK. For PST, of the 11 vessels it owns and operates, 10 are leased back to Sponsor PIL while 1 is to CSAV. FSLT has 8 charterers. So far, we gather from management of all three shipping trusts that all payments have been prompt. However, we are aware that there is room for renegotiation (down) of leases for a short period should any of the lessees face headwinds from slowing trade. We also understand any loss in revenue will have to be made good for when the lessee is able to and/or when the cycle turns.
Financing/Credit lines intact for PST and FSLT. For FLST, the earliest debt facility comes up for refinancing in Apr 2012. However, it will need to amortise US$5m per quarter from Sep 2010 to Apr 2012. In PST’s case all loans are on an amortising basis. For RMT, it will need to repay US$130m, a short term debt facility in 1Q10. Of the 3, both PST and FSLT have noncommitted capex. RMT has an aggressive capex program of US$1.3bn to acquire 13 (two have been delivered). Out of this, US$712m of funding requirements for vessel deliveries in FY10 have yet to be finalized.
Best pick in this environment – FSLT. Our preferred pick in this sector is FSLT. No uncommitted capex program with no refinancing of any loan until 2012. Maintain Buy for FSLT with a TP of S$0.97. We downgrade PST (Hold, TP S$0.29) and RMT (Hold, TP S$0.63).
Shipping Trusts – OCBC
Sharp sell-off across sector
Pessimism rules the seas. We attended Marine Money’s Asia conference earlier this week where the mood of both speakers and participants was overwhelmingly pessimistic. Conversation was focused on two key themes:
1) consequences of the current credit crisis on ship and trade finance; and
2) unfavorable industry outlooks, especially for the container and dry bulk sub-sectors.
Sharp sell-off across trusts. First Ship Lease Trust (FSLT); Pacific Shipping Trust (PST); and Rickmers Maritime (RMT) were all in attendance. ince our last sector report dated Sept 10, the shipping trusts have seen a sharp sell-off in share prices (FSLT down 61%, RMT down 58%, and PST down 37%). We attribute the decline to both transient fears: today’s abnormal credit conditions which have paralyzed equity markets; and to more enduring concerns: the trusts’ extensive use of leverage and overall industry concerns.
Beware the fine print. FSLT announced last week that its lenders had invoked the market disruption clause (MDC) as the reference rate on the loans, the US$ LIBOR, did not accurately reflect the lenders’ actual cost of funds. With increased interest costs, FSLT reduced its DPU guidance for 4Q08 by 1%. PST and RMT told us that some version of the MDC also exists in their loan documents but it has not been invoked as of now. The MDC is a standard clause in almost all loan documents. In our view, the next bit of fine print to watch is loan-to-value.
Multiple layers of risks. There is a very real risk of a large depreciation in underlying asset and rental values. Falling asset values can breach a loanto- market value covenant, triggering a technical default (and potentially distressed sales). We note that PST is the only shipping trust without a version of this clause in its loan documents. Meanwhile, counterparty risk is also becoming more of a concern – a charterer default or rate renegotiation could stress cash flows, endangering distributions or debt repayments. Committed capex is another possible stressor.
The recent sell-off is an overcorrection (in our view) but market logic is trumping everything else at present and we believe we could see further value destruction. We maintain our BUY ratings on PST and RMT, and our HOLD rating on FSLT but place all our fair value estimates under review as we work in latest developments. We believe the trusts will continue to be barraged by negative news flow on the shipping industry.
PST – BT
PST takes delivery of its biggest vessel so far
PACIFIC Shipping Trust (PST) yesterday took delivery of its biggest vessel to date – the 4,250-TEU (twenty-foot equivalent unit) CSAV Laja, increasing its slot capacity by 24 per cent to 21,714 TEUs.
It also announced that subscription for its preferential offering to raise about US$92.3 million begins today.
The move is aimed at positioning it for yield-accretive acquisitions.
The 11th vessel begins its five-year time charter to Compania Sud Americana de Vapores SA today following PST’s acquisition of the vessel from Pacific International Lines unit Tranpac Holdings Inc, Panama, which at the same time raises its total indicative asset value to US$435 million.
‘Apart from the increased revenue, the entry of this newbuilding is significant because it further diversifies PST’s vessel sizes and charterers. CSAV is one of the oldest shipping companies in the world and the largest in Latin America and we look forward to increasing our portfolio of long-term charters to such reputable industry players,’ said Alvin Cheng, CEO of PST Management Pte Ltd, the trustee-manager.
In November, PST is expected to take delivery of its 12th vessel, bringing total slot capacity to 25,964 TEUs, with a total indicative asset value of US$510 million.
Mr Cheng added: ‘We have started to see the correction of vessel prices, which we had earlier anticipated – this will provide us with possible opportunities to improve our returns by seeking out yield-accretive acquisitions at the right price. This is in line with our diligently managed growth plans for PST and we aim to continue generating attractive returns to unitholders.’
PST’s preferential offering will strengthen its capital structure and provide it with an increased borrowing capacity, thus enhancing PST’s financial flexibility to pursue medium-term yield-accretive growth opportunities, Mr Cheng said.
Singapore-registered unitholders will be able to subscribe for their entitlements from today to Sept 24.
The offer is on the basis of three new units at 36.5 US cents each for every four existing units held.
‘We look forward to the participation from each and every Singapore-registered unitholder of PST as the preferential offering will lower our debt levels and create room to raise new investment funding to react swiftly to acquisition opportunities when they arise,’ said Mr Cheng.
PST shares closed half a US cent down at 35.5 US cents yesterday.