Category: PST
PST – DBS
DPU cut will add little value
• Plans to cut payout from current 90% to potentially 70% from 3Q09
• FY10 DPU forecast reduced by 20%
• Gearing, distribution policy already conservative
• We see limited strategic potential of this move, downgrade to FULLY VALUED, TP US$0.22
2Q09 results, payout in line. Pacific Shipping Trust’s 2Q09 results were in line with expectations and consistent with 1Q09 performance – with revenue of US$15.5m and net distributable cash of US$5.8m. The Trust paid out 90% of total cash generated (after debt repayment)- as per its practice in previous quarters – and DPU amounted to 0.99UScts per unit, compared to 0.98UScts in 1Q09 and 1.09UScts in 2Q08.
Rationale behind DPU cut is not clear. The Trustee Manager will be reviewing its distribution policy, with a view to reduce payout and conserve more cash from 3Q09. Management anticipates that payout for 3Q09 would not be lower than 70%. Given that PST is already the most conservative among the three shipping trusts in terms of distribution policy and gearing – distributable cash is only arrived at after accounting for debt repayment every quarter – we are not sure how the proposed DPU cut will add value. While management remains on the lookout for opportunistic acquisitions, the US$1.5-2m additional cash that can be saved per quarter does not look to be realistically significant for any transaction.
Looks expensive on FY10 basis. On other fronts, the discussions with troubled customer CSAV are still ongoing and we look for a ~30% charter rate cut at worst. Adding the impact of the cut in payout, we reduce our FY09 and FY10 DPU forecasts by 8% and 20%, respectively, and downgrade the stock to Fully Valued at a TP of US$0.22 (target yield of 12% on FY10 DPU). Having gained 72% YTD, the stock – trading at 10.7% FY10 yield – looks expensive compared to its peers.
Shipping Trusts – BT
Eyes on shipping trusts’ results
FIRST Ship Lease Trust (FSLT) may have set the wheels of an inevitable slide in the fortunes of the shipping trusts for the rest of the year in motion with its downward revision of distribution per unit (DPU) on Tuesday.
The other two SGX-listed shipping trusts, Pacific Shipping Trust (PST) and Rickmers Maritime, are due to report their second quarter results today and in early August respectively. The outlook for the shipping sector in general and the shipping trusts specifically has been deteriorating over the past quarter.
FSLT cited a change in policy to repay more debt faster as the reason for reducing its DPU from the third quarter onwards. Both FSLT and Rickmers have been hit by loan-to-value covenant breaches in recent months.
FSLT is planning to use around half of its free cash flows to prepay loans, which should ease its woes with the banks. ‘We understand this new guidance is driven by discussions with lenders. We expect loan-to-value covenant concerns to become a non-issue once these discussions conclude,’ said OCBC Investment Research in a report released yesterday.
Analysts seem to be looking more kindly at FSLT in the wake of its new policy. ‘A consolation – in our opinion, this is finally a realistic number,’ added OCBC in its report where it rerated FSLT to a buy from a hold with a fair value of 76 cents.
OCBC went on to explain that ‘right since we initiated coverage over a year ago, we have been saying the trust’s aggressive payout was unsustainable’.
‘With this new approach, FSLT now looks more like a viable long-term investment vehicle for serious shipping trust investors,’ it concluded.
Rickmers is the next trust likely to face similar issues, and may even be in a slightly worse position because it has new vessel deliveries with unsecured financing coming due. ‘Funding risks are high with a US$130 million facility due next year as well as unfinanced capital expenditure of US$712 million,’ said DnB NOR.
SIAS Research, however, offered some hope for Rickmers by suggesting that Rickmers’ sponsor Rickmers Group will provide support with either financing or helping to negotiate postponement of the deliveries.
OCBC, however, was not as benign. In an earlier report it said: ‘We think the Q2 DPU decision may be driven by conflicting forces: it may make sense to cut or freeze distributions entirely to save cash to fund obligations and to appease lenders. But the cash saved is small relative to what is needed.’
Against this backdrop, PST looks the most stable relatively. The trust’s sponsor is locally-owned container line Pacific International Lines and it has no loans coming due in the next five years. It has also fully financed all its vessels and has no committed capex in the near future. The trust has a very conservative acquisition policy that should put it in a good position in the troubled times ahead.
PST – OCBC
No respite yet
Container market continues to struggle. A new Drewry Shipping Consultants’ report projects a 10.3% market contraction in global box traffic over 2009, and a small 1% growth next year. It estimates that 27m fewer TEUs will be handled for the year than in 2007. Drewry also says “continued unsustainable freight rates” are pushing smaller companies to the brink of financial collapse. The head of Maersk Line said in an interview last week that growth in shipping volumes in 2010 is unlikely – he expects capacity utilization in the industry to fall further over the next 12 months1 . July is a key month as some major liners implement widely publicized rate increases. Trans-Pacific carriers have also proposed rate hikes starting August to bring freight rates back to ‘compensatory levels’. It remains to be seen if these increases take hold in the broader market.
CSAV uncertainties remain. Pacific Shipping Trust (PST)’s negotiations with its charterer, CSAV, have yet to be formally resolved. CSAV won concessions from other ship-owners in late May. According to Lloyd’s List, charter rates for 85 vessels will be cut by 36% for two years with the owners accepting half of the cash equivalent of the rate reduction in terms of shares in CSAV. It is unclear whether a renegotiation with PST, which has two vessels chartered out to CSAV, would parallel this deal or take another shape entirely. CSAV has also raised US$145m in new equity with the sale of more than 300m new shares in the company. Counterparty risk of default (on CSAV) has certainly moderated and we are more sanguine about how negotiations play out. Nonetheless, the devil is in the details and there is no guarantee that the ultimate deal will be equally favorable to both sides. The reaction of PST’s lenders to any concessions granted is also an unknown.
Valuation. PST faces uncertainty on two fronts – the CSAV renegotiation and a sickly container industry. Industry concerns are a deeper and likely more protracted overhang on PST in our opinion. Current price levels present deep value but with little evidence of an imminent industry turnaround, we think it is presumptuous to turn buyers. We bump our fair value estimate up to US$0.24 from US$0.16 to reflect moderated risks on the renegotiation. This represents a 30% discount to our ‘normal’ case discounted FCFE value of S$0.34 (10% discount rate). Our estimates (which assume a 30% cut in charter rates to CSAV) are unchanged. Maintain HOLD.
Shipping Trusts – UOBKH
Valuation Methodology Switched From DCF To P/B
Valuation method changed to P/B. We switch valuation methodology for the three Singapore-listed shipping trusts, namely First Ship Lease Trust (FSLT), Pacific Shipping Trust (PST) and Rickmers Maritime (RMT), from discounted cash flow to P/B, which is the common method for valuing shipping stocks.
Fair prices raised, but recommendations unchanged. We believe the P/B methodology will be more reflective of and responsive to the changing risk profile of the shipping trusts, as financing risks are reduced as and when the shipping trusts overcome their balance sheet hurdles on the back of easing of credit and a recovery in ship prices. The shipping sector (as proxied by container shipping stocks) typically trades at 0.5x P/B at a cyclical trough and 2.5-3.0x at a cyclical peak.
FSLT. We raise our fair price for FSLT from S$0.50 to S$0.64 based on 0.8x 2010 P/B of the container shipping sector because FSLT’s net gearing of 138% is quite comparable with the sector’s gearing of 143%. FSLT remains a HOLD.
RMT. We also increase RMT’s fair price from S$0.44 to S$0.76 based on a lower 2010 P/B of 0.4x, a shade below US peer Danaos’ P/B of 0.5x, because RMT would have a similarly very high net gearing of 4.0x assuming debt financing for the US$700m capex due in 2010 relating to the purchase of four containerships to be chartered to Maersk. While our fair price for RMT is 24% above its current share price, we maintain our HOLD call in view of its unfunded US$700m capex due in 2010. We see a re-rating in RMT should it manage to resolve this financing hurdle.
PST. Unlike the other two shipping trusts, PST has no loan-to-value covenants with its bankers. Its net gearing ratio of 1.0x is the lowest among the three trusts. We reiterate BUY on PST with a revised target price of US$0.37 (previously US$0.22) based on 2010 P/B of 0.9x, higher than the P/B ascribed to the other two shipping trusts given its stronger financial position.
Shipping Trusts – DBS
Concerns easing selectively
• Stability in container shipping rates should spark renewed interest in shipping trusts
• FSLT – given that it has no imminent refinancing or counterparty issues – is best positioned
• German ship-owners rescue CSAV, PST may breathe easier
• Too many uncertainties still for Rickmers
Liner companies looking to push rate hikes. Most of the leading container carriers, including Maersk and NOL are now looking to arrest the free fall in container freight rates through coordinated rate increases. While the problem of lower trade volumes, idle capacity and a huge orderbook will still need some solving, we may be seeing some stability in rates for the rest of 2009. This, combined with the improving sentiment about a global economic recovery in 2H09, should spur renewed confidence in container shipping stocks, and consequently, shipping trusts.
Visibility improving bit by bit. FSLT has a more diversified fleet than peers – with about 38% exposure to containers and 65% to tankers (oil, chemical, product). With the oil price in recovery mode, counterparty risk may be reduced. Moreover, FSLT has no big refinancing risks before 2012. Elsewhere, with the US$360m lifeline thrown to CSAV by German owners last week, PST’s fortunes may be looking up as well. However, RMT has to contend with unfunded capital commitments and an upcoming bullet loan repayment in FY10 and the picture still looks hazy.
FSLT is our top pick, upgrade to BUY. Given the healthy response to the 1Q09 dividend re-investment scheme, investors seem to be giving the thumbs up to FSLT’s attempt to align the interests of both short-term and long-term investors. As such, given the lack of nearterm concerns, we believe there is better visibility to FSLT’s dividend payouts, despite trading at much higher yields of about 25%. Hence, we upgrade the stock to BUY, and our DDM-based TP is revised up to S$0.71.
Upgrade PST to HOLD. We are also upgrading our call on PST to HOLD with a revised TP of US$0.20, given that the worst that can happen now on its CSAV charters is a 35% rate cut. Elsewhere, we maintain our HOLD rating on RMT with a revised DDM-based TP of S$0.50.