Category: Rickmers
Shipping Trusts – OCBC
Sharp sell-off across sector
Pessimism rules the seas. We attended Marine Money’s Asia conference earlier this week where the mood of both speakers and participants was overwhelmingly pessimistic. Conversation was focused on two key themes:
1) consequences of the current credit crisis on ship and trade finance; and
2) unfavorable industry outlooks, especially for the container and dry bulk sub-sectors.
Sharp sell-off across trusts. First Ship Lease Trust (FSLT); Pacific Shipping Trust (PST); and Rickmers Maritime (RMT) were all in attendance. ince our last sector report dated Sept 10, the shipping trusts have seen a sharp sell-off in share prices (FSLT down 61%, RMT down 58%, and PST down 37%). We attribute the decline to both transient fears: today’s abnormal credit conditions which have paralyzed equity markets; and to more enduring concerns: the trusts’ extensive use of leverage and overall industry concerns.
Beware the fine print. FSLT announced last week that its lenders had invoked the market disruption clause (MDC) as the reference rate on the loans, the US$ LIBOR, did not accurately reflect the lenders’ actual cost of funds. With increased interest costs, FSLT reduced its DPU guidance for 4Q08 by 1%. PST and RMT told us that some version of the MDC also exists in their loan documents but it has not been invoked as of now. The MDC is a standard clause in almost all loan documents. In our view, the next bit of fine print to watch is loan-to-value.
Multiple layers of risks. There is a very real risk of a large depreciation in underlying asset and rental values. Falling asset values can breach a loanto- market value covenant, triggering a technical default (and potentially distressed sales). We note that PST is the only shipping trust without a version of this clause in its loan documents. Meanwhile, counterparty risk is also becoming more of a concern – a charterer default or rate renegotiation could stress cash flows, endangering distributions or debt repayments. Committed capex is another possible stressor.
The recent sell-off is an overcorrection (in our view) but market logic is trumping everything else at present and we believe we could see further value destruction. We maintain our BUY ratings on PST and RMT, and our HOLD rating on FSLT but place all our fair value estimates under review as we work in latest developments. We believe the trusts will continue to be barraged by negative news flow on the shipping industry.
Rickmers – OCBC
Has derated significantly; maintain BUY
Second MOL acquisition completed. Rickmers Maritime (RMT) recently accepted delivery of its 12th vessel, MOL Dedication, the second of 13 additional vessels RMT is contracted to buy over 2008-2010. Newbuild MOL Dedication will be time chartered to Japan’s Mitsui O.S.K. Lines Ltd (MOL) for a 10-year period. It is the second of five 4250-TEU containerships costing US$72m each that will be chartered to MOL. The first, MOL Dominance, was delivered in June 2008. The remaining three MOL vessels are also expected over 2H08. Contributions from the five MOL vessels should increase RMT’s 2H revenue, which makes up 56.1% of our full-year estimate.
Ambitious growth plans. RMT’s debt-to-equity ratio had increased to 0.91x at 30th June from 0.77x as at the end of 1Q. Including MOL Dedication, RMT will spend US$288m on the Mitsui vessels coming in over 2H. Its heavy acquisition program continues beyond 2008: it will spend US$276m on the four vessels slated for FY09; and US$711.6m on the four megacontainerships to be delivered in FY10. On 2Q equity levels of about US$417m, this implies a debt-to-equity of roughly 1.6x by end FY08, 2.2x by end FY09, and 3.9x by end FY10.
Equity issue inevitable (but not immediately). RMT’s aggressive growth plans are supported by its ability to run time charters with long term visibility. It plans to fund the contracted acquisitions using a combination of retained cash, debt and equity. RMT has already arranged for new credit facilities to fund its FY08 and FY09 purchases. RMT has US$608.3m in unused debt facilities (before paying for MOL Dedication), which gives it some breathing space in the nearer term. However, an equity issue will be inevitable over FY09-FY10 in order to accommodate RMT’s debt repayment schedule and the US$771.6m vessels due in FY10.
Has derated significantly. In line with turbulent markets and the Singapore-listed shipping trust sector, RMT saw volatile movements in its share price last week. It fell to a low of 88 S cents on Thursday before recovering to 93.5 S cents by Friday’s close. A lot of the noise came from the broader market but a major RMT-specific concern is that institutional investors make up a significant portion of its unitholder base. Such overhang is a concern across the high-yield space including other shipping trusts, business trusts and S-REITs. RMT is our top pick for the shipping trust sector and we think today’s 13.6% yield (FY08F) looks attractive. Maintain BUY with S$1.22 fair value.
Shipping Trusts – OCBC
Ships and sustainability
Priced or mispriced? The three Singapore-listed shipping trusts – Pacific Shipping Trust (PST), Rickmers Maritime (RMT) and First Ship Lease Trust (FSLT) – are currently trading at very high distribution yields of about 12- 15%, or a staggering 10,000 basis point spread over the 10 yr Singapore government bond yield. While this particular asset class is new to Singapore, similar structures exist elsewhere. The trusts have historically traded at a 300-500 basis point premium over their US peers. While the headline yield is attractive, it is not a free lunch (in our view) as it comes hand in hand with some significant debt and equity requirements.
Business model relies on external financing… Vessels decline in value as they age and the shipping trusts address their need for fleet renewal either indirectly or directly by using their cash earnings to: (1) pay out the depreciated asset value as fair compensation for the loss in equity value (which increases the headline yield number but is not income), (2) partially repay debt and preserve net asset value or (3) retain and use towards buying new vessels. Debt-funded assets are also depreciating and the principal value must eventually be repaid (or refinanced). On top of this, all three trusts have ambitious growth plans. The cash earnings generated and retained by the trusts is not enough to fund these growth plans internally.
…in an uncertain world. Keeping in mind an aggressive payout policy (of varying degrees) and aggressive growth plans (across the board); we believe that the shipping trust model relies extensively on external financing. We believe that in today’s market conditions, there is limited investor (or even lender) appetite for structures that are reliant on debt and equity expansion to sustain their business and growth model. The weakening outlook for the shipping industry is a further complication. Based on the risk-reward quantum in play today, we downgrade our rating on the shipping trust sector from Overweight to NEUTRAL.
We peg our fair value to ‘floor value’. In the current climate, we prefer to continue to value the shipping trusts on a discounted free cash flow to equity basis. On this ‘floor value’ basis, we have a BUY rating on PST [fair value: US$0.41], a BUY on RMT [fair value: S$1.22], and a HOLD recommendation for FSLT [fair value: S$1.20]. Our top pick is RMT because of its relatively less aggressive payout policy and the credit facilities it already has in place to partially support its growth plans.
Rickmers – OCBC
Continues strong performance in 2Q
Good 2Q results. Rickmers Maritime (RMT) posted a good set of 2Q results, recording US$23.7m in revenue, up 6% QoQ. The results were broadly in line with our estimates. Unitholders will receive DPU of 2.25 US cents from this quarter onwards, up 5.1% from the previous 2.14 US cents payout. RMT did well on a QoQ basis with revenue rising 6% over 1Q and net profit increasing to US$9.2m, up 9.7% QoQ. The improvement was primarily because of about 20 days’ contribution from MOL Dominance, which was delivered in early June. The 4250-TEU containership costing US$72m was the first of 13 vessels that RMT is contracted to acquire over FY08-10.
2H will be acquisition heavy. RMT is buying a total of five Mitsui vessels – the remaining four, costing US$288m, are slated for delivery over 2H08. Full impact of the first vessel and contributions from the remaining four should increase 2H revenue, which makes up 56.1% of our full-year estimate. We note that per the unitholders’ circular dated April 2008, the second Mitsui vessel – newbuild MOL Dedication – was slated for delivery on 30 July. However, there have been delays at China’s Dalian shipyard and RMT now expects the vessel in end August (with no penalties charged by Mitsui). We have revised our 3Q estimates downwards – FY08F charter revenue falls by less than 1% to US$104.8m – to take into account the delayed delivery but assume the other vessels are still on track to meet the delivery dates estimated in RMT’s April circular.
Gearing is increasing. As of this quarter, RMT’s debt-to-equity ratio has increased to 0.91x from 0.77x as at the end of 1Q. RMT will spend another US$288m on the remaining four Mitsui vessels coming in over 2H; US$276m on the four vessels slated for FY09; and US$711.6m on the four megacontainerships to be delivered in FY10. On current equity levels of about US$417m, this implies a debt-to-equity of roughly 1.6x by end FY08, 2.2x by end FY09, and 3.9x by end FY10. RMT has US$608.3m in unused debt facilities, which gives it some breathing space in the near-term. We believe RMT can avoid the equity markets in 2H08, but will need to tap new equity over FY09-11 to satiate its aggressive growth plans and the repayment schedule on its debt facilities. RMT is trading at a compelling 10.8% FY08F yield; maintain BUY with S$1.22 fair value.
Rickmers – BT
Rickmers beats Q2 forecast with US$9.2m profit
SHIPPING trust Rickmers Maritime reported a net profit of US$9.2 million for the second quarter ended June 30, 53 per cent higher than its forecast.
Total revenue of US$26.22 million also beat projections by 14 per cent, while the distribution per unit (DPU) was 2.25 US cents, 5 per cent more than the forecast 2.14 US cents.
Rickmers Maritime was constituted on March 30, 2007, and commenced activities only upon its listing on May 4, 2007.
As such, comparisons were done with projections as ‘comparisons with actual figures would not be meaningful’.
For the first six months of the year, net profit totalled US$17.59 million, 53 per cent better than forecast, while US$50.87 million was chalked up in total revenue, 19 per cent higher than the projected US$42.65 million.
DPU for the first half was 4.39 US cents compared with the forecast 4.28 US cents.
The strong performance was on the back of smooth operation of the fleet, lower cost of lubricant oil and early delivery of newbuildings, Rickmers Trust said in a statement.
Charter revenue for 1H08 amounted to US$46.01 million, 8 per cent higher than expected.
‘We secured a total debt of US$627.5 million in the midst of credit crisis as well as achieved shareholder approval for Rickmers Maritime to raise up to US$650 million of equity. These measures provide us with sufficient financing flexibility to execute our acquisition strategy going forward,’ said Quah Ban Huat, CFO of Rickmers Trust Management, the trustee-manager.
As at June 30, Rickmers Maritime’s portfolio comprised 11 container ships, which are chartered out on long-term, fixed-rate time charter basis with an average remaining charter period of seven years.
Rickmers’ shares closed one cent down at $1.13 yesterday.