Category: Rickmers
Ricmkers – OCBC
US$1.1b order book is a burden
US$1.1b order book. In November, Rickmers Maritime (RMT) took delivery of its 13th vessel, MOL Delight for US$72m. We estimate its gearing will increase to 1.4x by the end of the year from 1.1x debt-to-equity as at 30th September. RMT expects to take delivery of 10 more vessels costing over US$1.1b from now to 2010 (with the charters and charter rates already locked in). RMT has credit facilities in place for the next six ships worth US$420m.
High leverage has a high price. Despite an aggressive acquisition program, RMT has been able to defer raising more equity by ramping up gearing in the near term. This increased leverage comes at a price. Consequently, the trust’s debt repayment requirements have accelerated and certain loan tranches have only 1-2 years maturities. We estimate that if RMT continues on its current ‘debt-first’ trajectory, it would have to repay around US$17.9m of debt in FY09 and another US$157m in FY10. Our estimates suggest that even if RMT diverted 100% of its cash income to pay off debt, it would not be enough to service the FY10 dues. An equity issue will be necessary.
At what price, equity? We also note that credit facilities for the US$711.6m vessels due in FY10 have not been arranged yet. We believe the market value of those vessels would have taken a hit versus the asset cost pre-fixed by RMT. So even if lenders provide 100% loan-to-market value, it would not cover the cost of the vessel. We expect the terms on those facilities to be even more stringent, and expect fresh equity will again be needed to fund the FY10 vessels. In total, we estimate that RMT needs around US$600m in fresh equity, at least, over the next two or three years. At current price levels, any issue would be highly dilutive to existing unitholders.
Unappetizing risk-reward ratio. We believe order book concerns will define 2009 for RMT. Worst case solutions to ‘disappear’ the order book include an outright vessel sale, a sale-and-leaseback or a sponsor “bailout” (equity or asset warehouse). We expect any such resolution to be a positive catalyst for RMT’s share price, and the best case scenario for unitholders. Another major concern is the potential breach of the loan-tomarket value covenant on existing loans. The outcome of any breach will depend on the continuing strength of RMT’s blue chip charterers and the health and risk appetite of its lenders. Maintain HOLD with S$0.40 fair value.
Shipping Trusts – OCBC
Victims of the cycle
More turbulence ahead… The last several years have seen major export growth as well as a commodities boom. This drove a boom in shipping – manifested in both an increase in rates as well as a demand for increased capacity, and led to increased asset prices and the construction of more ships. Asset prices soared at ‘bubble speed’ in the past couple of years, partly because of an aggressive use of leverage. The global economy then turned in early 2008 and the shipping industry was caught with a huge capacity and a large order pipeline. The industry has already seen a sharp reduction in charter rates. Asset values are expected to fall as the cycle corrects. We expect this decline to be steep in line with the deleveraging cycle.
2008 was about growth. Investors and managers of yield instruments in a bull market (rising asset values) and a cheap market (easy credit) were caught in a growth trap. The focus was on who could ramp up leverage and consequently, who could grow the fastest. The three Singapore-listed shipping trusts were all formed at, or very near, the peak of the shipping cycle. Consequently, their ships were priced at high valuations. They then continued to grow aggressively (at those same stratospheric price levels) – the sector has invested some US$1.3b since listing, more than doubling their IPO portfolio, in a space of less than two years. This growth was achieved through an aggressive use of leverage.
2009 is about survival. We believe valuations in 2009 will be driven by the health and strength of the three trusts, with the main focus on survival. Technically, shipping trusts are structured as long term, cash generating entities that have the ability to ride out short-term cycles. Unfortunately, the sector’s hunger for higher leverage has made them victims of those
same cycles. The biggest threat to the sector is the loan-to-market value (LTV) covenant. An LTV breach, not outside the realm of possibility, triggers a technical default. The ultimate outcome, possibly lower (or zero) distributions or distressed asset sales, depends on the health and risk appetite of the trust’s lenders. Pacific Shipping Trust is the only trust without LTV requirements. We expect capital commitments to be another overhang on valuations in 2009 – Rickmers Maritime has US$1.1b in new vessels coming in from now until 2010. This level of growth, previously a positive, has now become a burden. We have a NEUTRAL rating on the sector.
Rickmers – OCBC
Steady 3Q
Steady 3Q. Rickmers Maritime (RMT) posted US$26.5m in 3Q revenue, up 97% YoY and 12% QoQ thanks to a steady stream of vessel acquisitions since its May 2007 IPO. The trust will distribute 2.25 US cents for the quarter. We note that the expected delivery dates for three more MOL vessels on order have been pushed back slightly and we have adjusted our earnings estimates accordingly. As of end 3Q, RMT is geared at about 1.1x debt-to-equity.
Containership industry faltering. The looming prospect of a global recession and an immense industry order book are pointing to tougher days ahead for the containership industry. News has been dominated by falling freight rates and reports of vessel redeployments and lay ups. RMT charters out its vessels on long-term, fixed rate charters and is less vulnerable to short-term volatility. The charter expiries are staggered, with only one potential lease expiry in the near-term (end 2009). The key risk is counterparty risk, and a consequent charter default or rate renegotiation. RMT’s customers are amongst the top 10 liner companies in the world.
The LTV risk. The demand-supply imbalance is also creating a downward stress on asset values, posing a more immediate threat to RMT because of the loan-to-market value (LTV) covenant in its loan agreements. The breach of the required LTV ratio amounts to a technical default. The cost of debt ratchets up and lenders have a right to demand a “top-up” in terms of cash or additional assets as collateral. With a breach, RMT would have to renegotiate its position with its lenders and possible outcomes could include a vessel sale or a diversion of cash flows to repay debt – impacting unitholder distributions.
Orderbook becomes a burden. RMT expects to take delivery of 11 new vessels costing US$1.2b over 4Q08 to 2010 (with the charters and charter rates already locked in). RMT has credit facilities in place for the first seven ships worth US$492m. An equity injection was planned to partially fund the acquisitions (and accommodate debt repayment terms). Worst case alternatives include an outright vessel sale, a sale-and-leaseback or a sponsor “bail-out” (equity or asset warehouse). RMT can defer the equity issue but it cannot avoid it forever – even with all else equal, at current price levels, the threat of dilution trumps the lure of value. We like RMT for its blue chip charterers and its partial cash retention policy but find the above issues difficult to downplay. Downgrade to HOLD with S$0.40 fair value.
Rickmers – BT
Rickmers Q3 revenue doubles, profit up 15%
SHIPPING trust Rickmers Maritime continued to deliver consistent and on-target results with third-quarter charter revenue almost doubling and net profit rising 15 per cent.
The three months ended Sept 30, 2008, saw charter revenue rising to US$26.5 million from the previous corresponding quarter’s US$13.46 million and net profit climbing to US$9.7 million from US$8.37 million.
Cash flow from operating activities increased 89 per cent to US$19.6 million and helped the trust keep distribution stable at US$9.5 million or 2.25 US cents per unit, maintaining its distribution rate for the second consecutive quarter.
The sharp increase in charter revenue was due mainly to the consistent flow of new vessels coming onto Rickmers Maritime’s portfolio, resulting in additional charter hire days available during the period.
For the first nine months, charter revenue leapt to US$72.6 million from US$20.8 million previously and net profit more than doubled to US$27.3 million from US$11.22 million while cash flow from operating activities more than trebled to US$54.8 million from US$16.25 million.
Allaying concerns about a slowdown in the container line market, CEO Thomas Preben Hansen assured investors that Rickmers Maritime has a strong pipeline of vessel deliveries and long-term leases that stretches into 2020 and it enjoys secured total revenue of about US$2 billion over the period. ‘Rickmers Maritime has very limited exposure to the charter market before 2014,’ Mr Hansen said.
Emphasising the strength of the trust’s counterparties, Mr Hansen added: ‘We have not been contacted for renegotiation of contracts and don’t expect it to happen given the quality of our charterers.’
The trust has secured funding for its capital expenditure for the next year, said CFO Quah Ban Huat.
Rickmers Maritime closed four cents higher at 42 cents yesterday.
Shipping Trusts – DBS
Shipping woes spreading to trusts
Shipping industry concerns bearing down on share prices. Concerns on all three shipping trusts – First Ship Lease, Pacific Shipping Trust and Rickmers Maritime – have been on : (a) stability of revenues, cashflows and DPUs; (b) rising counterparty risks; (c) availability of credit lines; and (d) fast declining asset values.
Revenue sustainability. Leases are locked in. FSLT’s has an average lease term of 9 years with the earliest lease coming up for renewal in 2014. For PST, the average lease term is 7 years, with the earliest coming up for renewal in 2013. In the case of RMT, the average lease term is 7 years, with the earliest lease expiring in 2012.
Counterparty risk is low for now. RMT currently operates twelve container vessels leased out to blue-chip charterers – Italia Maritima, CMA CGM, AP Moeller Maersk, Hanjin Shipping, Mitsui OSK. For PST, of the 11 vessels it owns and operates, 10 are leased back to Sponsor PIL while 1 is to CSAV. FSLT has 8 charterers. So far, we gather from management of all three shipping trusts that all payments have been prompt. However, we are aware that there is room for renegotiation (down) of leases for a short period should any of the lessees face headwinds from slowing trade. We also understand any loss in revenue will have to be made good for when the lessee is able to and/or when the cycle turns.
Financing/Credit lines intact for PST and FSLT. For FLST, the earliest debt facility comes up for refinancing in Apr 2012. However, it will need to amortise US$5m per quarter from Sep 2010 to Apr 2012. In PST’s case all loans are on an amortising basis. For RMT, it will need to repay US$130m, a short term debt facility in 1Q10. Of the 3, both PST and FSLT have noncommitted capex. RMT has an aggressive capex program of US$1.3bn to acquire 13 (two have been delivered). Out of this, US$712m of funding requirements for vessel deliveries in FY10 have yet to be finalized.
Best pick in this environment – FSLT. Our preferred pick in this sector is FSLT. No uncommitted capex program with no refinancing of any loan until 2012. Maintain Buy for FSLT with a TP of S$0.97. We downgrade PST (Hold, TP S$0.29) and RMT (Hold, TP S$0.63).