Category: Shipping Trusts
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$0.63).
Shipping Trusts – OCBC
Sharp sell-off across sector
Pessimism rules the seas. We attended Marine Money’s Asia conference earlier this week where the mood of both speakers and participants was overwhelmingly pessimistic. Conversation was focused on two key themes:
1) consequences of the current credit crisis on ship and trade finance; and
2) unfavorable industry outlooks, especially for the container and dry bulk sub-sectors.
Sharp sell-off across trusts. First Ship Lease Trust (FSLT); Pacific Shipping Trust (PST); and Rickmers Maritime (RMT) were all in attendance. ince our last sector report dated Sept 10, the shipping trusts have seen a sharp sell-off in share prices (FSLT down 61%, RMT down 58%, and PST down 37%). We attribute the decline to both transient fears: today’s abnormal credit conditions which have paralyzed equity markets; and to more enduring concerns: the trusts’ extensive use of leverage and overall industry concerns.
Beware the fine print. FSLT announced last week that its lenders had invoked the market disruption clause (MDC) as the reference rate on the loans, the US$ 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.
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.
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 – BT
Shipping trusts to gain higher proilfe
Like Reits, they will shed their low-profile status when investors get a better feel of the asset class, reports
ON THE very night when the Dow shed 294 points after the Fed cut rates, Warren Buffet came forward to comment on the possibility of the much dreaded ‘R’ word that all investors did not wish to hear, particularly during this jolly festive season – recession.
With a possible US recession looming in 2008, yield and defensive plays may possibly be the flavour of the next season. The question then is: What are some examples of local listings that provide investors with a shield from the volatile markets. Today, we take a closer look at a fairly new asset class – shipping trusts.
Concept of a shipping trust
A shipping trust is essentially a hybrid product of an equity and a fixed income asset, providing high dividend yields and accretive growth.
As a business trust, a shipping trust is made up of a legal entity (trustee) which controls and manages assets on behalf of the unit holders that effectively own the assets and receive a regular stream of payouts.
In the case of shipping trusts, the trustee manager buys and leases vessels for a period of time in return for a steady flow of lease payments from the shipping firms (lessees). The lease period is typically between five and 10 years, during which the trust will lock in the fixed charter rates, thereby providing cash flow visibility and stability to investors.
The long-term lease period also means that unit holders of the trust are shielded from the volatility of the highly cyclical shipping industry as ‘these leases will expire on a staggered basis . . . allowing the charters to take advantage of higher charter rates in the future by managing the timing of fixing of charters’, says DBS Vickers’s Jasvinder Sandhu in a recent report.
Not well understood
Despite offering some of the highest yields in the markets today – 9-11 per cent – these shipping trusts have yet to win the hearts of local investors. Indeed, the three locally listed shipping trusts – First Ship Lease (FSLT), Pacific Shipping Trust (PST) and Rickmers Maritime Trust (RMT) – have all been lagging behind the broader market ever since their respective debuts on the SGX between half and one-and-a-half years ago. In fact, all are still trading below its IPO prices to date.
SGX vice-president of listing Tan Suan Hui attributed the lackluster performance of the shipping trusts to investors’ unfamiliarity with the sector at this point in time.
‘Shipping trusts are relatively new investment instruments compared to, say, Reits. As such, it is expected that investors will take some time to learn about their features including their stable dividend yields, potential capital gains through acquisition of assets and the generally tax efficient structures which allow dividends to be distributed to investors free of tax at both the trust and individual investor level,’ she said.
Such a view is supported by a November report published by UOB Kay Hian which has attributed the underperformance of the three shipping trusts to the perception among investors that 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.
The report adds that accretive acquisitions will drive a re-rating of the three shipping trusts soon. UOB Kay Hian has ‘buy’ calls on all of them.
High and stable dividend yields, potential capital gains and generally tax-free structures – both at trust and individual investor’s level. Sounds too good to be true?
Well, there are, of course, a number of risks involved as well. The fundamental risk in the trust is the credit risk of the lessees where the latter may default on payments in the event of sharp economic downturn. However, such a risk can be mitigated on the part of the trustee manager by structuring a diversified portfolio of charterers.
Says FSLT chief executive Philip Clausius in an earlier BT report: ‘The true risk is the creditworthiness or counterparty risk. We invest in various sectors because there is limited correlation between the sectors.’
When asked if he agreed that the growth of shipping trusts may be limited, Mr Clausius says: ‘It is true that the growth of the shipping trusts do not come from the existing portfolios but from acquisitions due to the typically flat long-term fixed lease rate. Therefore, the capital structure of the trust at IPO is critical.’
Citing figures from shipping yield plays in the US, Mr Clausius adds: ‘Shipping yield plays in the US have delivered annual total shareholder returns in excess of 20 per cent as distributions have grown and the yields have compressed.‘
Raising investor awareness
Looking ahead, both Mr Clausius and Ivy Lim, chief financial officer of PST, agree that the local investors’ understanding of shipping trusts is improving even though there is still much room for improvement. Both liken the current situation of the shipping trusts in Singapore to the early stages of Reits in the Singapore market and are optimistic about their prospects.
Says Ms Lim: ‘If we look towards the Reit model, when Reits were introduced in Singapore just five years ago, the yields were in the range of 6.5 to 8 per cent. However, the market has since rewarded Reits with growth stories, pricing them at much lower yields . . . it will only be a matter of time before there is a re-rating of this asset class and we (should) see yield compression.’
For now, an increase in investor awareness and a better understanding of shipping trusts is something that all three are proactively working towards to. Recently, they jointly conducted a seminar with SGX to educate investors on this asset class.
In addition, all three share the view that the possible listing of more shipping trusts on the SGX would be good for the industry as a whole, because it will mean more publicity and analyst coverage in this fairly under-researched industry.
And with more shipping trusts expected to be listed on the SGX soon, as revealed by KPMG executive director Leonard Ong at a maritime conference in September, one thing is for sure: The local shipping trusts will soon say goodbye to its low-profile status as new players add critical mass to this fledging sector – and more joint efforts are taken to raise the average investor’s awareness about this novel asset class.