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

Pacific Shipping Trust (PST) reported a net profit of US$0.466m for 1Q08. Excluding fair value losses on interest rate swaps of US$3.645m, net profit would have been US$4.111m. This appears to be ahead of our 2008 net profit of US$14.0m. Net profit for the remaining quarters of the year should register higher earnings due to the impact of 2 new containerships.

However, PST has declared a DPU of 0.97 US cts, 6.7% lower than 1Q07’s 1.04 US cts. 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 have assumed a payout of 95% in FY08 instead of 90%. We are currently forecasting a DPU of 4.4 US cts for FY08. Maintain BUY and our target price of US$0.50.

Raising earnings forecasts to reflect ship acquisitions

Raising our forecasts for ship acquisitions. We are raising our earnings forecasts for the acquisition of four new ships from Pacific Shipping Trust’s (PST) sponsor Pacific International Lines (PIL). Two of these ships are chartered back to PIL for a term of eight years while the other two ships will be chartered to CSAV, the largest liner shipping company in South America, for a term of five years. The four new ships will expand PST’s portfolio of vessels by 50% to 12 from its initial fleet of eight ships (which are on remaining charters of 6-8 years). In total, the four new vessels are expected to raise PST’s total contracted revenue p.a. by 79% to US$61.9m. We raise our 2008 and 2009 earnings forecasts to US$14.0m and US$17.8m for 2008 and 2009 respectively from US$13.9m and US$14.6m respectively, and initiate our 2010 forecast at US$19.4m.

Acquisitions to be funded by debt, thus causing gearing to spike up. PST is funding these new ships entirely by debt. We estimate PST’s net gearing will rise rapidly from 69% as of end-07 to 217% by end-08. However, we have assumed an issue of new shares of 25% of total share capital in 2009 and 10% in 2010. If the Singapore stock-market’s weakness continues into 2009, a rights issue would be more likely than a share placement. PST’s net gearing is forecast to fall below 100% by 2011. The trust has an acquisition target of US$200m p.a. Apart from the four new ships that have been announced, we have not factored in other ship acquisitions.

Despite issue of new shares in 2009 and 2010, DPU should still improve. Despite our assumption of new share issues in 2009 and 2010, we expect DPU to improve from 4.3 US cents in 2007 to 4.4 US cents in 2008 and 4.7 US cents in each of 2009 and 2010. These translate into DPU yields of 10.7-11.5% over the next three years. We maintain our target price of US$0.50 for PST, based on a fair value 2009 net yield of 9.5%. Maintain BUY.

Debt 2.0 – Changing the Game

Attractive distribution yield. Pacific Shipping Trust (PST) is a listed shipping trust. Its shipping income is tax-exempt and distributions are also tax-exempt for all investors. Based on its existing assets only, PST offers an estimated distribution of 4.41 US cents for FY08. With its current price at US$0.40, this amounts to a mammoth yield of 11%. In comparison, the Singapore 10-yr government bond yields 2.4%.

Preserves value of the assets. Vessels are depreciating assets so the value of unitholders’ ownership (equity) is eroding constantly. Each shipping trust has its own strategy for addressing the asset erosion problem. PST has pegged its debt repayment to its depreciation charge, reducing the trust’s liabilities by as much as its assets erode. This preserves the net asset value, or the value of what the unitholders own.

Debt model key differentiator. PST’s NAV preservation strategy – while a sustainable business model – is not our preferred strategy for dealing with asset erosion. However, this conservative debt repayment pattern does allow unitholders to enjoy accretion from far greater leverage. PST’s debtto- equity will jump to a staggering 2x after it completes its US$222.2m worth of contracted acquisitions for this year. However, this ratio will decline as PST repays its debts. By only paying out net profits to unitholders, PST protects the principal invested by the unitholders and debtors – ensuring that the borrowed asset can pay for itself.

Debt Model 2.0. PST is currently using some of its net profit and the entire depreciation component of its cash income to repay debt (the balance is distributed to unitholders). However, we believe its new 2008 acquisitions will be made on a debt repayment pattern that is more favorable to unitholders. We estimate that DPU will increase sharply from 4.3 US cents in FY07 to 4.68 US cents in FY08 (+9% YoY) and 5.74 US cents in FY09 (+33% from FY07 and +23% YoY).

Target price US$0.55. Our DCF value of the unitholders’ share in the trust is US$0.55, a 37.5% upside from the current price. Our valuation reflects the steep jump in DPU we expect after the four new acquisitions this year. The sharp absolute increase in DPU will also make PST’s DPU yield more competitive relative to the other shipping trusts. This could very well be a catalyst for price appreciation in the nearer term. We are initiating coverage on PST with a BUY rating.

Pacific Shipping Trust Q4 DPU up 6% to 1.1 US cents

PACIFIC Shipping Trust (PST) will be distributing 1.1 US cents per unit for the fourth quarter of 2007.

This is 6 per cent higher than the 1.04 US cents distributed for the corresponding quarter in 2006.

Based on its initial public offering price of US$0.45 per unit, the distribution per unit (DPU) amounted to an annualised yield of 9.7 per cent, said PST. The yield came to 10.6 per cent based on the closing price of US$0.41 of PST units on Jan 21.

The rise in the DPU came on the back of higher income distribution for the fourth quarter ended Dec 31, 2007, which amounted to US$3.7 million, compared with US$3.52 million a year ago.

The Q4 2007 distribution will bring full-year income distribution to US$14.5 million, which represents 100 per cent of PST’s distributable amount as set out in its IPO prospectus. The amount is net of repayment of a loan principal.

Net profit for Q4 2007 totalled US$1.6 million compared with US$3.4 million in Q4 2006. The decrease was due to fair value losses in interest rate swaps (entered into to fix the cost of borrowings) which have no impact on the distributable income.

The net profit was achieved on gross revenue of US$8.7 million from the charter of PST’s existing portfolio of vessels and interest income.

Said Subhangshu Dutt, CEO of PST Management, the trustee-manager of PST: ‘For the past six quarters, we have consistently exceeded our IPO projections and we are reasonably confident of maintaining this performance in 2008.’

‘Our four new vessels coming on stream this year are expected to raise PST’s total contracted revenue per annum by 79 per cent. We hope to continue improving on our performance in the coming years with further quality acquisitions.’

Last year, PST announced the acquisition of four vessels which will expand its current portfolio by 50 per cent to 12.

PST’s current fleet comprises eight vessels valued at US$287 million as at December 2007. The valuation, carried out by an independent ship broker, was 15 per cent higher than their book value and nearly 6 per cent above the vessels’ total purchase price.

The latest distribution of 1.10 cents will be made on Feb 29. Unit-holders do not have to pay Singapore tax on the distributable income.

PST is the first business trust listed on the Singapore Exchange. It provides shipping companies with financing and leasing structures that enable them to expand their fleet without straining their capital.