Proposes a non-renounceable 3-for-4 rights issue at US$0.365/unit

Proposes a non-renounceable 3-for-4 rights issue. Pacific Shipping Trust (PST) has announced a non-renounceable rights issue of 252.75m units at US$0.365/unit (5.2% discount to the volume weighted average share price on last Friday) to raise US$92.3m cash to partially fund the acquisition of four vessels, namely two 1-800-TEU container vessels – Kota Nabil and Kota Naga – and two 4,250-TEU container vessels – CSAV Laju and CSAV Lauca. These four vessels are acquired at a total cost of US$222m and will increase PST’s shipping fleet from eight to 12 vessels. The rights issue will be on the basis of three new units for every four existing units held. Pacific International Lines (PIL), PST’s sponsor, undertakes to subscribe for its entitlement, based on its current direct stake of 34.64% in PST. PIL also undertakes to subscribe new units that are not taken up by minority unitholders, without triggering a mandatory offer. The rights issue is expected to close by end-Sep 08.

Dividend yield will be intact. PST targets a long-term debt-to-assets gearing of 60%. 98% of the net proceeds of circa US$90m from the rights issue will be utilised to reduce borrowings incurred for the acquisition of new container vessels in 2008. We revise our 2008, 2009 and 2010 net profit forecasts by 0.6%, 18.9% and 16.7% respectively to US$16.5m, US$25.8m and US$27.2m. However, we adjust downward our 2009 DPU from 4.7 US cents to 4.4 US cents due to a marginal dilution by the rights issue despite interest savings. 2010 remains unchanged at 4.7 US cents.

Balance sheet strengthened for more vessel acquisitions. Post rights issue, the trust would have a balance credit facility of US$121m for acquisition of additional vessels, which should enhance future DPU. Our earnings forecasts have not factored in the acquisition of other vessels besides the four new vessels acquired in 2008. In view of a reduced forecast DPU for FY09, we lower our target price from 50 US cents to 47 US cents. Our fair value is pegged at FY09 net yield of 9.5%. PST offers an annual net yield of 11.7% for 2008 and 2009 and 12.5% for 2010. Despite a large rights issue, PST still offers very attractive dividend yields.

2QFY08: DPU Should Continue Improving With New Vessels

2QFY08 DPU 12% higher than 1QFY08’s. Pacific Shipping Trust (PST) reported a net profit of US$8.3m for 2QFY08 (1QFY08: US$0.5m, 2QFY07: US$5.5m). Excluding gains/losses on interest rate swaps of US$3.8m, net profit would have been US$5.2m (1QFY08: US$4.5m, 2QFY07: US$3.2m). Net profit should continue to improve due to the impact of new ships. Distributable income for 2QFY08 was US$3.6m (1QFY08: S$3.3m, 2QFY07: US$3.6m). The increase in distributable income was due to a fullquarter contribution from Kota Nabil and the maiden contribution from Kota Naga which was delivered at end-May 08. Both vessels are chartered to PST’s sponsor Pacific International Lines. Two 4,250 TEU vessels, CSAV Laja and CSAV Lauca, will be delivered in 2HFY08.

Net profit forecasts revised up, but distributable income forecasts maintained. Our earnings forecasts do not take into account gains/losses on interest rate swap contracts. These gains/losses are non-cash items and fluctuate from quarter to quarter depending on interest rate movements. They have no impact on PST’s distributable profit and cash. However, we raise our net profit forecasts for FY08, FY09 and FY10 by 17-22% to US$16.4m, US$21.7m and US$23.3m respectively on lower-than-expected depreciation as PST’s ships are now depreciated over 30 years instead of 25 years. Our distributable income forecasts remain at US$15.7m, US$22.1m and US$23.1m for FY08, FY09 and FY10 respectively. PST has declared a DPU of 1.09 US cent for 2QFY08, 12% higher than 1QFY08’s 0.97 US cent.

Maintain BUY and target price. Delivery of the four new containerships in FY08 will expand PST’s portfolio of vessels by 50% to 12 from its initial fleet of eight ships. The four new vessels are expected to raise PST’s total contracted revenue p.a. by 79% to US$61.9m. We maintain our target price of US$0.50 for PST, based on a fair value FY09 net yield of 9.5%. PST offers an annual net yield of 11-12%. Maintain BUY.

Acquisitions help increase DPU

Strong quarter, once again. Pacific Shipping Trust (PST) enjoyed a great 2Q, bringing home US$10m in revenue, up 16.6% YoY and 13.4% QoQ. Earnings were boosted by the full quarter contribution of 1Q buy Kota Nabil and new 2Q acquisition Kota Naga. Net profit came in at US$8.3m, including US$3.8m in non-cash gains. The trust’s earnings came in slightly ahead of our estimates with the new vessels enjoying lower interest costs compared to previous debt-funded buys. Last quarter, PST had reduced cash distributed to 90% of distributable income (after debt repayment) from 100% previously. 1Q DPU consequently fell 12% QoQ to 0.97 US cents. For 2Q, PST will pay out 1.09 US cents a share – up 12% QoQ, back to 3Q07 levels (see Exhibit 1). We expect DPU to continue to increase thanks to the full-quarter contribution of Kota Naga in 3Q and the other two vessels coming in over 2H08.

Acquisitions help increase DPU. PST has been able to increase its DPU despite the reduced payout because of its new acquisitions. The new 2008 assets have a lower asset yield vis-à-vis the initial portfolio (still high relative to other shipping trusts). However, they are more DPU accretive due to a) lower finance costs, and b) more favorable debt repayment terms versus the initial portfolio. Recall that distributable income is from cash remaining after debt is repaid so DPU accretion from debt-financing vessels hinges on the repayment pattern. Debt on the initial portfolio is being paid off quite conservatively over about 11 years. After all four vessels slated for the year come in, we estimate the overall repayment scale will lengthen to a quite reasonable 20 years versus a typical asset life of 25-30 years. We believe this is still a sustainable debt repayment model (which preserves equity by reducing liabilities in line with the erosion in vessel value).

Equity issue inevitable. PST is at a 1.3x debt-to-equity level as of 30 Jun, up from 1.05x at 31 March. We estimate that PST’s debt-to-equity will hit around 2.1x by year end after all 2008 acquisitions are completed. The trust has a yearly acquisition target of US$200m. While we continue to feel a sustainable debt-to-equity level is 1x, the trust has been able to “postpone” an equity issue by increasing gearing beyond 1x in the nearterm. At this acquisition pace however, the need for fresh equity is inevitable. Maintain BUY with US$0.48 fair value estimate.

Lower DPU in 1Q08, but should improve with new ships

Pacific Shipping Trust (PST) reported a net profit of US$0.47m for 1Q08. Excluding fair value losses on interest rate swaps of US$3.6m, net profit would have been US$4.1m. This appears to be ahead of our 2008 net profit of US$14.0m on what appears to be lower-than-expected depreciation of US$2.5m (1Q07: US$3.2m). Net profit for the remaining quarters of 2008 should register higher earnings due to the impact of four new containerships. Our earnings forecasts do not take into account gains/losses on interest rate swap contracts. These gains/losses are non-cash items and fluctuate from quarter to quarter depending on interest rate movements. Such gains/losses have no impact on PST’s distributable profit and cash.

However, PST has declared a DPU of 0.97 US cts, 6.7% lower than 1Q07’s 1.04 US cts. Income available for distribution was US$3.3m (1Q07: US$3.4m) after retaining US$0.5m for working capital. PST has lowered its payout to 90% from 100% because it believes it is prudent to set aside cash to provide for future working capital and to support long-term strategic development of the trust. We are maintaining our earnings and DPU forecasts.

The four new ships to be delivered in 2008 will expand PST’s portfolio of vessels by 50% to 12 from its initial fleet of eight ships. In total, the four new vessels are expected to raise PST’s total contracted revenue p.a. by 79% to US$61.9m. We maintain our target price of US$0.50 for PST, based on a fair value 2009 net yield of 9.5%. Maintain BUY.

DPU hit by a reduced distribution payout

Results in line but… Pacific Shipping Trust (PST) posted 1Q results yesterday and things were generally in line. The first vessel out of the four acquisitions slated for 2008, Kota Nabil, was delivered in March and made its maiden contribution of 21 days of income. Gross revenue from charter income rose 4% to US$8.85m. All other charges were line except for a spike in expenses due to non-recurring charges arising from the four acquisitions. Cash income, the amount available for distribution, rose 9% YoY to US$3.7m, or 1.1 US cents per unit.

…DPU hit by reduced payout. However, PST decided to reduce its distribution payout to 90% – or a DPU of 0.97 US cent, down 7% YoY and 12% QoQ. That works out to a distribution yield of 9.3%, much lower than the other shipping trusts which are trading at over 11% yields. The press release offered a vague and contradictory explanation: On one hand, PST’s board feels that “given current financial market conditions, [it] would be prudent to set aside cash”. In the same breath – and sentence – the board is also saying that the cash is to provide working capital for growth and expansion, not for debt reduction. We note that after completing these four acquisitions, PST’s debt-to-equity ratio will hit 2x or more by yearend. At some point, an equity issue is inevitable.

Is DPU reduction permanent? A lower payout does not have to mean a lower full-year DPU, due to the new acquisitions that are coming in this year. In 2Q, Kota Nabil will make a full quarter’s worth of contribution. The other three vessels will also arrive progressively through the year. Depending on the interest expense on the new vessels, full-year DPU could still be higher than last year’s despite the reduced payout. Additionally, payout going forward is “at least 90%” so the amount retained could fluctuate QoQ.

Reducing fair value. PST’s house is still in order – its fundamentals are going strong, especially as 2008’s four acquisitions start kicking in. But a clear and coherent narrative from PST as to why they reduced payout – and for what – has yet to emerge. This story is still building. For this reason alone, we cut our fair value estimate to 48 US cents, almost 13% lower than our previous estimate. We will revisit our estimates as the narrative builds. Maintain BUY.