That sinking feeling

• 2Q09 DPU cut to 0.60UScts from 2.14UScts earlier – however usage of cash retained not specified.
• No indicative timeline yet on talks with bankers over bullet loan roll-over or covenant waivers
• Unfunded capex woes also persist; downgrade to SELL – target price reduced to S$0.40

DPU cut overshadows healthy operations. While we had highlighted the possibility of more DPU cuts from RMT in our earlier note, the quantum of the DPU cut – by 72% from 2.14UScts in 1Q09 to 0.60UScts in 2Q09 – took us by surprise. As did the fact that management did not provide any concrete guidance on the usage of the cash retained. Distributable income, however, surged 18% q-o-q to US$19.9m, riding on a 15% increase in revenue to US$37.5m. Net profit of US$5.2m was affected by US$7.5m provision on the Maersk Djibouti, which is up for redelivery in Feb-2010 and is currently lying idle.

String of woes still pending resolution. Like other shipping trusts, RMT is currently negotiating a waiver on its loan-to-value covenants. However, unlike peer FSLT (BUY, TP S$0.71), no indicative timeline for conclusion of talks has been provided. The more pressing worry for investors, though, is the refinancing of its US$130m bullet loan due in April’10 – which has been highlighted by the Trust’s auditors as a risk to its going concern assumptions.

Cash retention – how much is enough? While the Trust has resolved some immediate cash flow problems by deferring up to US$20m deposit payments due in 2H09 for the vessels on order, we believe it may even have to suspend distributions over a few quarters to resolve its refinancing woes – similar to what US-listed peer Danaos Corp has done since early’09. We believe this DPU cut and the perceived lack of clarity on negotiations with various stakeholders should weigh heavy on investors’ minds and downgrade the stock to SELL at a reduced TP of S$0.40 (FY09-10 DPU estimates cut by 54-60%). Downward pressure on share price will also make equity fundraising (which is inevitable if it honours its order commitments) more difficult.

Rickmers cuts Q2 DPU to US0.6cents to conserve cash

RICKMERS Maritime Trust (RMT), the last of the shipping trusts to report second-quarter results, has reported the biggest cut of all in distribution per unit (DPU) – a 73 per cent plunge to just 0.6 of a US cent. First Ship Lease Trust (FSLT) cut DPU to 2.45 US cents from 2.8 US cents previously while at Pacific Shipping Trust (PST), the drop was to 0.99 US cent from 1.09 US cents.

Both also held out the possibility of further cuts from the third quarter, FSLT to 1.5 US cents and PST to 70 per cent of distributable income from 90 per cent currently. RMT declined to give a DPU guidance for the remaining quarters. All three trusts cited cash conservation amid uncertain times as reasons to cut distribution. RMT, however, did continue to chalk up increases in charter revenue, operating cash flows as well as income available for distribution.

Q2 revenue rose 59 per cent to US$37.6 million from US$23.7 million for Q208 due to expansion in operating fleet to 16 vessels compared with 11 a year ago. For the first half, charter revenue rose by just over half to US$70.1 million compared to US$46 million for H108. Operating cash flow also rose 56 per cent to US$28.7 million for the second quarter and 58 per cent to US$55.9 million for the first half.

Fleet utilisation remained high at 99.8 per cent with only 5.5 off-hire days out of a total of 2,718 vessel ownership days.

Q2 income available for distribution was 42 per cent higher at US$19.6 million. However, net profit fell 43 per cent to US$5.2 million due to provision of US$7.5 million for asset impairment, which RMT provided for after taking into account the potential early re-delivery of the Maersk Djibouti in February and subsequent lower charter rate in 2010 given the current weak container shipping market.

Looking ahead, negotiating a waiver of value-to-loan (VTL) covenants and the refinancing of RMT’s US$130 million top-up loan facility maturing in April 2010 remain challenges, management warned. RMT also has the spectre of unsecured funding for its four 13,100 TEU ships, due for delivery in the latter part of 2010, hanging over it. Management is currently in discussions with various stakeholders to resolve the matter, RMT said, adding that a financial adviser and investment bankers have been appointed.

Between a rock and a hard place

Between a rock and a hard place. We have a NEUTRAL rating on the shipping trust sector, which faces falling asset values and counterparty concerns driven by a weak shipping market. These broader issues are compounded for Rickmers Maritime (RMT) because of its high leverage (2.2x debt-to-equity as of 31-March) and sizeable contracted acquisitions that were committed to during the better days. To recap, our concerns include: 1) loan-to-value covenants on existing loans; 2) loan-to-value requirements that affect RMT’s ability to draw down committed loan facilities for the US$207m Hanjin acquisitions due in 2H09; 3) a need to repay up to US$154m in loans next year (our estimate); 4) no arranged financing for the US$711.6m in contracted acquisitions due next year; and 5) the likely redelivery of a vessel in February 2010 that could impact cash flows.

2Q DPU and its implications. At 2Q results, our focus will be on a possible update on ongoing negotiations for waivers on loan-to-value covenants; as well as the distribution amount declared for the quarter. RMT, which does not provide distribution guidance, paid out 2.14 US cents per unit in 1Q09. Coincidentally, this was the floor amount mandated under a subordination structure that expired 01 Apr. We think the 2Q 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. Cutting distributions could also hurt any potential equity-raising efforts, rather than help.

Don’t expect quick resolutions. Aside from the two aforementioned data points, we would be genuinely (positively) surprised if RMT is able to provide clarity on the larger issues. Our concern is that RMT is already unsustainably geared as it is; and the committed acquisitions leverage up the risk. Additionally, there is no clear roadmap of what the best solution is in this case: ideally the 2010 Maersk vessels worth US$711.6m would just “disappear” – but that may not be possible. And if an equity issue is required, unitholders will have to ask themselves if they want to fund purchases fixed at boom-time prices. With the high level of risk and no clear path out of the woods, we think it is prudent to maintain our SELL call. The recent price increase impacts the equity issue assumptions underlying our valuation. Our fair value estimate consequently increases to S$0.39 from S$0.29 previously.

Island top pattern suggests more near-term downside

– Rickmers Maritime is likely to face further correction pressure with the completion of an island top reversal pattern during yesterday’s negative breakout at the $0.56 key support level on heavy volume.

– This suggests that the previous rally from its early Apr low may be over.

– With the RSI cutting below both the 3-month uptrend line from inside the overbought region 2 days ago and the MACD displaying a sharp bearish crossover yesterday, they seem to echo our views that the further downside pressure could be building up.

– We expect the stock to find initial support at $0.45 (the next key resistanceturned support level), breaking which, the next support is likely at $0.32 (all time low)

– Immediate resistance is pegged at $0.56 (key support-turned-resistance level), ahead of $0.65 (2-year downtrend line).