Category: Rickmers
Shipping Trusts – UOBKH
Compelling yield plays for 2008
With uncertainties over the impact of the US economic slowdown on the rest of the world, we advocate taking some position in high yield, defensive earnings stocks. We see value in Singapore shipping trusts, namely First Ship Lease Trust (FSLT), Pacific Shipping Trust (PST) and Rickmers Maritime (RMT). They offer earnings visibility and steady high distribution yields of between 10.2%-12.7%. All three Singapore shipping trusts also continue to trade at a discount to their RNAV and DCF valuations. As such we reiterate our OVERWEIGHT recommendation for the sector.
FSLT. Among the three shipping trusts, FSLT currently has the lowest debt-to equity ratio of 0.38x. The trust has a target long-term debt-to-equity ratio of 1x. As such, future ship acquisitions can be funded by low-cost debt, leading to high yield accretion to unitholders. In Nov 07, FSLT acquired two 47,000DWT product tankers for US$113m. This acquisition had a relatively high asset yield of approximately 12.5% and boosted FSLT’s expected FY08 DPU by 17% from 8.92 US cents to 10.43 US cents. Assuming FSLT’s remaining debt capacity (based on a maximum forecast FY08 debt-to-equity ratio of 1x) to be utilised for ship acquisitions at similar asset yield, the trust could potentially increase its DPU by an additional 3.34 US cents, implying a potential DPU yield of 16.8%. We maintain our BUY recommendation on FSLT with a target price of US$1.22 (S$1.76).
PST. Debt restructuring is PST trump card. Of the three trusts, PST has the most conservative debt repayment structure (straight-line over 10-12 years from IPO as compared to its initial fleet’s remaining economic lifespan of about 26 years). We do not discount the possibility of debt restructuring though PST’s management has no plan to do so currently. PST is currently trading at a FY08 DPU yield of 10.2%. We maintain our BUY recommendation on PST with a target price of US$0.50.
RMT. RMT’s share price fell by 18.9% in the last two months. We have discussed with management this unusual share price weakness that has been specific to RMT and not experienced by the other two shipping trusts. We attribute RMT’s recent share price weakness mainly to selling by some institutional shareholders to raise cash in times of uncertainty. For instance, one of RMT’s cornerstone investors, Fidelity Investments Management has decreased its shareholdings in RMT from 12.97% to 11.6% between early to late-Dec 07.
At RMT’s current share price, it is trading at a FY08 DCPU (distributable cash per unit) yield of 13.7%, the highest among the three shipping trusts and a FY08 DPU yield of 10.7%. Unlike the other two trusts, RMT has a more conservative stance of retaining 25% of its distributable cash for reinvestment whereas the other two trusts pay out 90-100% their distributable cash. RMT is also the most competitive among the shipping trusts in terms of trustee fees and this bodes well for long-term investors. We maintain our BUY recommendation on RMT with a target price of US$1.19 (S$1.72).
Shipping Trusts – UOBKH
Singapore Shipping Trusts
Last week we hosted a roadshow for Rickmers Maritime (RMT) in Singapore and Malaysia. One of the key points raised during the roadshow was whether part of RMT’s dividend yield of 9-10% p.a. was a return of investor capital. Management disagreed with this general perception as RMT is retaining 25% of distributable cash for reinvestment. This differs from First Ship Lease Trust (FSLT) and Pacific Shipping Trust’s (PST) which pay out 100% of distributable cash.
RMT’s management said if the trust were a closed-end fund with no further equity injection, its equity would be intact (and would remain the same as the equity at beginning of the trust) when its initial fleet expires at the end of its economic life, some 30 years hence. By retaining 25% of its distributable cash, RMT’s equity will self-sustaining and invested into new ships. The retention of part of its distributable cash flow will ensure the perpetuity of RMT. We believe at current price, RMT offers great value as investors are effectively investing in a perpetual entity that pays a high dividend yield of 9-10% p.a.
Meanwhile, the other two trusts, PST and FSLT are forging ahead with ship acquisitions. PST recently announced the acquisition of two 1,800 TEU containerships from its sponsor. Pacific International Lines (PIL). These ships will be chartered back to PIL on a bareboat basis for eight years. This acquisition will enlarge PST’s fleet by 16%. FSLT recently acquired two 47,496 dwt product tankers from the Groda Shipping & Transportation group and were concurrently leased back to the sellers on a bareboat basis for a base term of seven years.
We remain positive on Singapore shipping trusts and have included them among our top defensive stock picks for 2008. Their defensive earnings are underpinned by long-term ship charter contracts of fixed charter rates for 5-12 years. Shipping trusts offer net yields of 9-12% p.a. and potential upside from accretive ship acquisitions. Maintain BUY on RMT (Target: US$1.19/S$1.72), PST (Target: US$0.50) and FSLT (Target: US$1.22/S$1.76).
Shipping Trusts – UOBKH
Singapore shipping trusts, namely First Ship Lease Trust (FSLT), Pacific Shipping Trust (PST) and Rickmers Maritime (RMT), have underperformed the STI, Sreits and other business trusts. Their share prices have fallen below their initial public offering (IPO) prices and FY08 and FY09 dividend yields have risen to 8.7% to 10.8%. We believe Singapore shipping trusts’ underperformance is due to the perception among investors that they are self-liquidating and a portion of their high dividend yields is a return of capital to investors as ships are depreciating assets with a lifespan of 30 years. Recent weakness in the US$ has also dampened share price performance.
We initiate coverage on the sector with an OVERWEIGHT rating. Our rationale is based on the following reasons:
Limited downside from current share price levels. Notwithstanding a weak US$, we see limited downside in Singapore shipping trusts. Assuming a 3.3ppt (i.e. annual ship depreciation) of their dividend yields is a return of capital, investors would still get a decent net return ranging from 5.4% to 7.5%. In the worst case of no future value accretion, which we believe is unlikely, this is an investor’s minimum return. Shipping trusts’ long-term, fixed nature of charter contracts of 5-12 years provide stable earnings, cash flows and dividends, cushioning against the short-term cycles of the shipping industry.
Growth element is not priced in. Accretive acquisitions will drive a re-rating of the shipping trusts. A case in point is the experience of US long-term charter, ship finance peers. Seaspan Corp, a similar ship finance company, suffered share price underperformance in the initial period post-IPO (Aug 05). However, as accretive ship acquisitions gained momentum, the stock was strongly re-rated with share price appreciating by more than 50% and its 2007 dividend yield compressed from above 9% at IPO to 6.0% presently. Danaos Corp, another comparable ship finance company, also had a similar experience since its IPO in Oct 06. Danaos is currently trading at 2007 dividend yield of 5.6%.
Ship acquisitions are gaining momentum. RMT, the most aggressive among the shipping trusts, has increased its fleet by more than three-fold since its IPO in May 07. PST has enlarged its fleet by 61% with its recent acquisition of two 4,250 TEU containerships and FSLT is confident about doubling its fleet in the next two years. Ships are being acquired at asset yields (net operating cash flow/investment cost, before financing) of 9.6% to 10.5% and project IRRs of 8.1% to 9.0%. Against a cost of debt of about 6% (if funded totally by debt) or a WACC of about 7% (if funded by a mixture of debt and equity), the acquisitions should be accretive.
Ample upside. We are forecasting a share price upside of 16% to 27% in 2008 and 6% to15% in 2009, with RMT to lead the sector’s re-rating. Dividend yield is our primary valuation methodology. We expect RMT’s yield to compress on re-rating from the current level of 8.7% to 7.5% by end-08 and 7.0% by end-09. As for FSLT and PST, we forecast their dividend yields to compress from their current +10% level to 8.5% by end-08 and 8.0% by end-09. Against our DCF valuations, PST, FSLT and RMT are currently trading at 35%, 19% and 16% discounts respectively. They are also trading at a P/RNAV of 0.73x to 0.86x, based on our RNAV estimates.
Risks: Shipping trusts face the same risks as any ship owner, but to a much lesser degree as earnings are substantially protected by their long-term charter contracts. A weak US$ does not have an impact on the earnings and distributions of shipping trusts. However, the depreciation of the US$ would have a negative impact on non-US$ investors (unless their investment currency is linked to the US$).
Strategy: OVERWEIGHT. We have a BUY rating on all three Singapore shipping trusts, FSLT, PST and RMT. Among them, RMT appears to be the most aggressive in terms of ship acquisitions while FSLT reduces operational risk with a diversified fleet. PST trades at the largest discount to our DCF valuation and could achieve greater distributable cash and dividend payout if it were to restructure its debt repayment.
FSLT (FSLT SP/Target: US$1.05). We expect FSLT to derive value accretion from funding ship acquisitions with low-cost debt. Among the Singapore shipping trusts, FSLT has the lowest debt-to-equity ratio of 0.1x. It is targeting US$200m worth of acquisitions p.a. Although it does not have an acquisition pipeline from its sponsor (unlike the other two shipping trusts), the shareholders of FSLT’s sponsor are shipping heavyweights in their own right with an extensive network of global contacts. We initiate coverage on FSLT with a target price of US$1.05 in anticipation of dividend yield compression to 8.5% by end-08. We forecast a further rerating in 2009 to a compressed yield of 8.0%, translating into a target price of US$1.11 by end-09.
PST (PST SP/Target: US$0.50). PST has also set itself an acquisition target of S$200m p.a. It recently acquired two 4,250 TEU containerships from its sponsor, Pacific International Lines (PIL). These two ships are part of the 38 which PST has the Right of First Refusal to acquire from PIL. These two new ships will increase PST’s fleet from eight to 10 ships and raise its fleet capacity by 61% from 13,864 TEUs to 22,364 TEUs. PST has a conservative debt repayment of 10-12 years from IPO. We do not discount the possibility of debt restructuring though PST’s management presently has no plans to do so. This would put PST on an equal footing with FSLT and RMT. The additional distributable cash arising from a debt restructuring could be used for ship acquisitions or higher dividend payout. We value PST at a dividend yield of 8.5% by end-08 and 8.0% by end-09. This translates into target prices of US$0.50 and US$0.53 respectively.
RMT (RMT SP/Target: US$1.19 (S$1.72)). Thus far, RMT has been the most aggressive in terms of ship acquisitions. Since its IPO, the trust has grown its fleet capacity more than three-fold from 10 ships with a total capacity of 40,910 TEUs to 23 ships of 131,560 TEUs. A strong pipeline from its sponsor supports RMT’s acquisitions. It has the most competitive trustee management fee structure among the three shipping trusts, which augurs well for the long-term interests of unitholders. We initiate coverage on RMT with a target price of US$1.19 (S$1.72), as its dividend yield forecast to compress to 7.5% in FY08 and a target price of US$1.37 (S$1.98) in FY09 with further yield compression to 7.0%.
Rickmers – BT
Rickmers’ quarterly profit 54% above projection
Shipping business trust’s revenue exceeds estimate by 19% at US$13.5m
SHIPPING business trust Rickmers Maritime yesterday reported its first full quarter of results since its initial public offering (IPO) in May, with net profit coming in at US$8.4 million, 54 per cent higher than projected.
Revenue was 19 per cent higher than projected, at nearly US$13.5 million.
This was due to the early delivery by over a month of a sixth containership, which led to over $2 million more in revenues and $900,000 in unanticipated profits, said the trustee-manager’s chief financial officer Quah Ban Huat.
With a lower-than-anticipated cost of lubricant oil, the early delivery led to Rickmers recording cash flow from operating activities of almost $10.4 million, over a quarter more than expected, he said.
Mr Quah emphasised the importance of cash flow, saying that as a business trust, Rickmers pays its distributions out of this item.
The trust will be making a quarterly distribution of 2.14 US cents per unit, payable this month. This is in line with its projection at the time of its IPO, and works out to an annualised 8.56 US cents. At Rickmers’ closing share price of S$1.44 yesterday, this represents an annual yield of over 8.6 per cent.
Asked whether the stronger cash flow might lead Rickmers to increase its payout, Mr Quah said it ‘will evaluate the possibility of doing so only at the appropriate time’.
During the quarter, Rickmers announced the acquisition of 13 new containerships, which will be delivered through end-2010.
All come with accretive, long-term fixed rate time charters to three of the world’s most reputable liner companies, said chief executive Thomas Preben Hansen.
The 13 vessels include four containerships of 13,100 TEUs (twenty-foot equivalents) each, which will be among the world’s largest when constructed. They also include nine containerships of 4,250 TEUs each.
The charter periods are also staggered – with only one ship becoming available in the next seven years – so that there is less risk of several ships having their charters expire during a downturn in the market, said Mr Hansen.
Downturns tend to be ‘fairly short and sharp’ and may ‘hit on a few ships’ but would not impact the trust’s ability to pay its distributions, he said.
Rickmers intends to focus on containerships, especially large ones of above 10,000 TEUs in capacity, for the time being, Mr Hansen also said. The segment enjoys double-digit growth year-on-year, compared with the 2 or 3 per cent growth rates in the dry bulk and carrier segments, so it can absorb over-capacity very quickly, he said.