PST adds MPP vessel class to the mix

IN a bid to diversify its vessel holdings, Pacific Shipping Trust (PST) has secured charters for two new 24,000-tonne multi-purpose vessels (MPPs) valued at US$30 million each.

The ships will be leased for 10 years to Xiamen Ocean Shipping Company China, a wholly owned subsidiary of Cosco China.

The charter rate for each vessel is US$14,900 per day. When delivered in September and December 2012, the vessels are expected to add US$108 million to PST’s total contracted revenue – an increase of 23 per cent that will take its total contracted revenue until October 2022 to US$570 million.

PST’s trustee-manager PST Management (PSTM) finalised both the chartering and vessel-building deal with shipyard Dalian Shipbuilding Industry Company.

At a briefing yesterday, when an analyst pointed out that the charter rate of US$14,900 per day was ‘rather high’, PSTM’s acting chief executive officer readily admitted it is.

‘This is a negotiated structure that we have with Cosco Xiamen,’ said Teo Choo Wee. ‘In return for this, we give them an option at the end of year 10 to purchase the vessel for US$14.7 million.’

Though some global reports show demand has softened for MPPs of late, Mr Teo said it will pick up. ‘The global fleet number of MPPs is small, but demand- wise, I think, is increasing.

‘With the number of infrastructure projects increasing globally, especially in developing countries and emerging markets, there will be tremendous requirements to transport specialised or project cargos, and we expect the demand for this type of vessel to continue,’ he said.

PST’s latest acquisition is meant to diversify its asset holdings and income sources. Prior to the new agreement, its fleet of 14 vessels consisted of 12 container ships, almost all of which are leased by its parent company Pacific International Lines (PIL).

The other two vessels are new additions, introduced in late June. PST bought two Cape-size 180,000-tonne bulk carriers for a total of US$123.2 million from Mitsubishi Corporation. They will be chartered to China-based steel company Jiangsu Shagang Group.

Cosco Xiamen coming on board as a charterer reduces PST’s reliance on PIL as its major income driver. Cosco Xiamen will make up 19 per cent of total contracted revenue, with Chinese steelmaker Jiangsu Shagang at 34 per cent and PIL at 35 per cent. CSAV accounts for the remaining 12 per cent.

Mr Teo said the decision to purchase and charter MPPs mirrors the actions of parent company PIL. In mid-June, PIL diversified into MPPs, lodging four new-build orders with Dalian Shipyard.

‘Cosco Xiamen was initially interested in taking over PIL’s vessels, but they were already committed in PIL’s keep,’ said Mr Teo. ‘So the decision was to explore with PST. The result is two direct deals with the two companies, Dalian and Cosco Xiamen.’

PIL will help fund the pre-delivery financing for PST.

PST was not left with much cash, said its chief financial officer Ivy Lim, with 12 per cent of the cost of the Shagang vessels paid up and another 3 per cent of the sum due in December.

PIL will therefore make a series of advances to PST, which includes the total amount as well as a 0.125 per cent arrangement fee of US$41,250 owed to PIL.

Currently, PSTM’s debt- to-asset ratio stands at 1:1. ‘But we plan to increase this slightly with the two vessels,’ said Ms Lim. ‘We haven’t finalised the final amount yet, but when we evaluate the financing structure, it will depend on the best course of debt and best course of equity we can get in the market. We put in very conservative numbers, and the numbers still make sense to our shareholders.’

Yesterday, PST’s shares closed unchanged at 31.5 cents.

DPU stable; first look at future growth

At a Glance

• PST’s 2Q10 results and distribution of 0.793UScts per unit in line with our expectations

• Existing cash flows look stable, management refocuses on growth plans with diversification into dry bulk sector

• Trading at about 11% FY10 yield, maintain our BUY call at TP of US$0.37 (9% target yield)

Comment on Results

DPU of 0.793UScts was declared for the quarter, which is similar to the 1Q10 payout. 2Q10 revenue of US$15.1m was steady on a sequential basis, and net profit held steady at US$6.6m. After regular loan amortisation of US$4.3m, net cash generated for 2Q10 amounted to US$6.5m – of which approximately US$4.7m will be distributed to unitholders and the remaining US$1.8m retained for future working capital purposes. This implies a payout ratio of about 72%, in line with existing conservative payout policy.

Outlook & Recommendation

As announced earlier, PST plans to acquire two new capesize bulk carriers for a consideration of US$61.6m each, for delivery in September 2011. The vessels come with a 10 -year long-term charter with Jiangsu Shangang Group of China, China’s largest private steel maker and we believe, a reputable counterparty. The 2 vessels represent about 28% of current book value and is PST’s first diversification away from the container sector. While the initial 15% deposit can be paid from existing cash reserves, the remaining 85% will have to be financed by a combination of debt and equity. Given the Trust is only likely to obtain 60% Loan-to-Value financing at best, that leaves a shortfall of around US$25-30m, which we believe could require another round of equity infusion next year.

Given that the new ships will be delivered in end-3Q of FY11, and financing will only be required around that point, we do not foresee any impact to FY10 DPU estimates. However, depending on the timing of equity issue and pricing, FY11 DPU may face some dilution. We are currently looking at about 5-7% DPU accretion in FY12, based on our assumptions. Maintain BUY and TP of US$0.37.

Pacific Shipping cuts Q2 DPU

PACIFIC Shipping Trust (PST) has pared its distribution per unit (DPU) by 20 per cent from a year ago to 0.793 US cents for the second quarter ended March 31 as it retained more cash to acquire new vessels.

Income available for distribution dipped 2 per cent to US$6.52 million in the second quarter. But 30 per cent of the distributable income was retained in the second quarter, compared to a previous 10 per cent, trust manager PST Management (PSTM) said yesterday.

The DPU of 0.793 US cents represents a tax-free annualised yield of 10.9 per cent.

‘This policy of preserving cash has enabled PST to acquire two new 180,000 deadweight tonne (DWT) capesize bulk carriers as announced on June 28, 2010,’ PSTM said.

These bulk carriers cost US$61.6 million each and are scheduled to be delivered in September next year, with a 10-year charter with Jiangsu Shagang Group Co.

The 10-year charter will add about US$194 million to PST’s contracted revenue, which will hit close to US$500 million over the next 10 years.

‘These new acquisitions mark a major milestone for PST to diversify into a new asset class and enlarge our base of charterers,’ said PSTM acting CEO Teo Choo Wee.

PST’s current fleet portfolio comprises 12 container vessels.

During the second quarter, gross revenue from the 12 vessels chartered on a long-term basis dipped 2 per cent from a year ago to US$15.15 million, with profit after tax remaining stable at US$6.64 million compared with US$6.66 million a year ago.

PST said that its balance sheet remains strong as all vessels have been financed on a long-term basis and that its loans do not have loan-to-value ratios on the vessels and top-up provisions.

The trust manager said it remains ‘cautiously optimistic for the outlook of the container market’ though it expects that chartered rates for container vessels will continue to recover amid improving freight rates and asset prices.

It also expects shipping demand for capesize bulk carriers to be sustained by China’s demand for iron ore and coal.

Mr Teo said PST will continue to explore ‘further opportunities for meaningful acquisitions’.

PST to buy two bulk carriers for US$123m

Purchase amounts to 75% of market cap, but PST has sealed charter of vessels

PACIFIC Shipping Trust (PST) yesterday said that it will acquire two capesize bulk carriers from Mitsubishi Corporation for a total of US$123.2 million. It also entered into two agreements for the 10-year time charter of each of the new vessels to China-based steel firm Jiangsu Shagang Group Co.

The consideration for the two vessels amounts to 75 per cent of PST’s market capitalisation of US$165 million as at June 25 – when its trustee-manager PST Management (PSTM) signed the contract with Mitsubishi. However, PSTM said that the acquisition is in line with ‘the ordinary course of business of PST’ because the commitment to purchase the vessels was done concurrently with the commitment to charter them out, and would not result in any significant change in its risk profile.

PSTM will fund the acquisition through a combination of internal cash, and debt and equity financing. The bulk of payment for the ships – 85 per cent – will be payable upon their delivery in September next year, while 12 per cent of the purchase price of US$61.6 million for each ship will be payable within six days of the signing of the relevant sales contracts. The remaining three per cent will be payable by December this year.

The two vessels are expected to contribute about US$194 million in charter revenue over the 10-year time charter period to Jiangsu Shagang – touted as China’s largest private steel enterprise. The amount is based on the US$27,000 a day that each vessel will fetch while it is chartered out to the Chinese steel company.

PSTM said that its acquisition of the two 180,000 deadweight tonne (DWT) – a measure of how much weight a ship is carrying or can safely carry – ships marks its foray into the non-container vessel segment of the shipping business.

Said PST Management’s acting CEO Teo Choo Wee: ‘We believe that this is the right timing to enter into a dry bulk acquisition. PST has acquired the vessels at an attractive price that is substantially lower than the prices contracted in 2007 and 2008 for comparable ships.’

The two ships will increase PST’s fleet to 14 vessels. PST said that all of its ships will be leased out on long-term, fixed-rate charters.

‘With long-term leases stretching into 2021, PST will enjoy stable income of close to US$500 million over the next 10 years.’

In April, PST said that it saw a 19 per cent drop in first-quarter distribution per unit (DPU) to 0.793 US cent, from 0.980 US cent a year back.

The DPU is also a drop from 0.827 US cent in Q4 2009, as revenue from the trust’s 12 vessels stayed flat at US$15.2 million.

Income retained for working capital rose to US$10 million, from US$3.2 million in Q1 2009. As a result, income for distribution fell to US$4.7 million, from US$5.8 million previously.

Yesterday, PST’s shares closed unchanged at 28 US cents after it resumed trading in the afternoon following its announcement.