PST preferential offering gets strong support

It expects to issue 252.75m new units at 36.5 US cents each

A PLANNED preferential offering by Pacific Shipping Trust (PST) received 98.7 per cent approval at an extraordinary general meeting of unitholders yesterday, with some retail holders asking about extra allocations.

Although PST cannot meet such requests, ‘the overwhelming support shown by unitholders is a strong endorsement of our prudent capital and risk management strategies and our plans for future growth’, said Alvin Cheng, CEO of trustee-manager PST Management. ‘This is also testimony to the faith and confidence that institutional and retail unitholders have in our long-term vision for PST.’

PST expects to issue about 252,750,000 new units at 36.5 US cents apiece on the basis of three new units for every four existing units held. The books closure date for the offer is Sept 11, 5pm.

‘We look forward to continuing support from each and every unitholder as we endeavour to deliver stable and growing returns,’ said Mr Cheng.

Pointing out that PST’s book value is 44 US cents per unit, he said the new units are being offered at a 17 per cent discount.

He also said that the increased number of units will increase liquidity and possibly boost trading in the trust’s units. ‘There is potential upside and good value that is not being recognised by the market at the current unit price,’ he said.

The exercise will raise US$92.3 million to finance and refinance part of the purchase of four new vessels. PST sponsor Pacific International Lines now has a 34.7 per cent direct stake in the trust.

Equity cash call, as expected

Equity cash call… Pacific Shipping Trust (PST) has announced a nonrenounceable preferential offering (PO) of 252.75m new units, on the basis of three new units for every four existing units. Pacific International Lines (PIL), PST’s sponsor and 34.64% unitholder, has agreed to subscribe for its pro-rated shares as well as any unsubscribed units. An EGM will be held on 27 August to obtain unitholders’ approval. The issue price of 36.5 US cents per new unit is at a 5.2% discount to Friday’s close of 38.5 US cents, and a 18.9% discount to PST’s IPO price of 45 US cents.

…as expected. We had repeatedly stated in our previous reports that an equity cash call was imminent as PST’s 2008 acquisitions and future acquisition plans (it has a soft target of US$200m in new vessel buys per year) stretched its leverage levels uncomfortably. PST estimates it will raise about US$92.3m in gross proceeds from the offering, which will be 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 (delivered in May); CSAV Laja (expected mid-September); and CSAV Lauca (mid-November).

Expect more of the same. 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 post the PO. We believe debt-to-equity beyond 1x is not sustainable in the long run – for one thing, debt repayment terms and schedules are more unfavorable as leverage increases. This current PO is part of PST’s ongoing debt-first-equity-later business model. If PST spends another US$200m in FY09 as per its acquisition target, we expect its debt-to-equity to again spike to roughly 1.7x by end 2009 – and bring it closer to its next equity injection.

Lowering fair value. We have revised our estimates to take the PO into account with our net profit estimates rising by 7-22% due to reduced interest expenses after the PO. The larger unit base (up 75%) more than offsets the decrease in interest expense, however, and our FY08F and FY09F DPU estimates¹ fall 4-30% to 4.27 US cents and 3.87 US cents, implying distribution yields of 11.6% (FY08F) and 10.5% (FY09F). We are lowering our fair value estimate to US$0.41 from US$0.48 previously to take into account a higher cost of capital and a more uncertain industry outlook. Maintain BUY.

¹ We assume a 90% payout is maintained

Attractive yield

Story: PST has announced plans to raise 272.75m new units (representing a 75% increase in units issued) at US$0.365 per unit. It will be offered to shareholders on the basis of 3 new units for every 4 units held. The EGM is scheduled to take place on 27 Aug and the exercise to be completed by end Sep 08.

Point: Total net amount raised of US$90.2m will be used to partly fund its vessel acquisitions of US$222m, of which two have been delivered, another two scheduled for delivery in Sep 08 and Nov 08 respectively. The acquisition of these four vessels will raise its fleet size to 12 vessels and its slot capacity by 87% from 13,864 TEUs to 25,964 TEUs. The equity fund raising exercise (EFR) will also result in PST having debt headroom of US$120m (translating to leverage of 60%) for future acquisitions, either from PIL’s pipeline and/or third parties.

Relevance: PST is the first shipping trust to undertake an EFR. Our forecast assumes US$120m of acquisitions for next year. We estimate DPU to be 4.1UScts and 4.2UScts per share for FY08 and FY09 respectively based on a 90% payout ratio. At US$0.375, PST is offering a yield of 11.1%. We peg a target price of US$0.45 (adjusted down from US$0.52) based on a target yield of 9%, the average of closest peers Danaos and Seaspan. Maintain BUY.

Pacific Shipping to raise US$92.3m

Proceeds set to finance part of cost of 4 new vessels

AS the global credit crunch starts to affect Singapore shipping companies, Pacific Shipping Trust (PST) yesterday announced a plan to raise US$92.3 million from the stock market through a non-renounceable preferential offering of new units. The proceeds are mainly intended to finance and refinance part of cost of four new vessels.

PST proposes to issue 252.8 million new units at 36.5 US cents per new unit – a 5.2 per cent discount to the average traded price on Friday – on the basis of three new units for every four existing units. The trust’s sponsor, Pacific International Lines (PIL) has undertaken – subject to some conditions – to subscribe and pay for its provisional allocation of the new units, as well as any new units that remain unsubscribed.

PIL is the major unitholder of PST with a current direct interest of 34.6 per cent.

‘In light of the current tight credit markets, the preferential offering represents a unique opportunity for unit holders to participate in a capital-raising exercise that provides certainty of funding, as it is fully supported by our sponsor PIL,’ said trustee-manager PST Management’s CEO Alvin Cheng.

‘While financing for the new vessels has already been secured, the proceeds of the preferential offering will lower our aggregate gearing, providing us with the financial flexibility to react swiftly as yield-accretive investment opportunities arise.’

The move will help strengthen PST’s balance sheet and reduce its leverage to 50 per cent from 69 per cent, Mr Cheng said. This will increase PST’s borrowing capacity to US$120.5 million and enable it to pursue medium-term yield growth opportunities.

Leverage of 70 per cent is about the maximum that lenders are comfortable with, and the fresh capital will give the trust more flexibility.

The increased capital base could also increase trading liquidity, with the percentage of trading units potentially rising to 75 per cent if minority unit holders take up all their allotments, PST said.

PST closed one US cent lower at 37.5 US cents yesterday.