Shipping Trust Primer
Shipping trusts as an asset class tend to be ignored and misunderstood by investors here despite making their debut on the Singapore Exchange more than two years ago.
As David Gerald, the president of SIAS points out at a recent SIAS seminar, they can provide stable and good yields and are relatively recession- and inflation-proof, which seems an ideal investment choice under the current bearish market conditions.
Most of the speakers at the SIAS seminar also note that there has been a perception that
shipping trusts are similar to shipping stocks, which tend to have a patchy record. They are not.
In fact shipping trusts are often subjected insulated from the vagaries of the shipping sector such as volatile freight rates, costs of fuel and even insurance costs for events such as accidents or hijacking by pirates for example.
Shipping trust companies – and there are three listed on the SGX – are often shielded from such short-tem fluctuations and uncertainties by the fact that these various costs are often borne by the shipping lines who lease the vessels from them.
So unlike shipping lines which profits and loss accounts can be rather volatile at times, investors are protected from the volatility of shipping cycles, as the ships are often leased on a long-term fixed rate charters to the world's largest liner companies. Their cash flow visibilities are hence often rather stable and also very transparent.
As DMG & Partners Securities' senior vice-president of research Terence Wong points out, "Shipping trusts are protected from the movements in the shipping industry, where the booms and busts are notoriously pronounced. The trustee-manager purchases vessels and typically leases them on long-term (eight to 10 years), fixed-rate basis. This provides clear cash flow visibility and stability to investors."
There are two types of leasing for shipping trust – bareboat charter and time charter. In a bareboat charter agreement, bunker charger and lube oil will be borne by bareboat charterers. In a time charter arrangement, the time charterer will be liable for the costs of the bunker fuels while the shipowner is responsible for the ship management costs and hence will be subject to the risk of an increase in lube oil costs.
Probably, the only concern that investors may face is that the payouts are typically in US dollars which value has been declining in recent months.
The fact however remains that shipping trusts here has been generating good yields of between 10% and 12%, which rank the best among the different asset classes in Singapore. Such yields compare favourably with those from real restate investment trusts (REIT) currently at about 5% to 6%, as well as shipping trust listed in the US, at about 7%.
First Ship Lease Trust (FSL Trust) recently announced that it is distributing US$14 million to its unit holders for the second quarter ended June 30, a year-on-year rise of 21.8%. This translates to distribution per unit (DPU) of 2.8 US cents, an increase of 27.9% from the previous corresponding quarter's 2.19 US cents. Compared with the preceding first quarter's 2.59 US cents, the increase is 8.1%.
The quarter's distribution translated into annualised DPU of 11.2 US cents, 27.9% higher than the 8.76 US cents for 2Q07. This equals to a distribution yield of 12.3% per year, based on FSL Trust's closing price of S$1.23 on July 21.
Meanwhile Pacific Shipping Trust (PST) will be distributing 1.09 US cents per unit for the second quarter ended June 30, up 2.8% on the 1.06 US cents distributed for the corresponding quarter last year. Unit holders will be getting a tax-free annualised yield of 11.4% based on the share price of 38.5 cents at the time of the results.
For more about shipping trust as an investment, click on the following:
Q&A: First Ship Lease (FSL) Trust
Can you give a brief description of your operations?
FSL Trust was formed to own and lease out vessels on a bareboat charter basis to the international shipping industry. Unlike other providers who lease vessels on a time charter basis, FSL Trust is not responsible for any vessel operating expenses such as crew, fuel, maintenance and insurance for the entire tenure of the lease.
FSL Trust is a ship financing trust, not a shipping company. It is focused on the purchase and subsequent/concurrent lease of vessels on a long-term bareboat charter basis, thereby, securing long-term rentals from the lease of the vessels to third parties. It is not involved in shipping operations and is, therefore, not exposed to ship operating expenses. Hence, it is relatively protected from the vagaries of the shipping cycle, unlike ship operators.
How much of your stock is owned by public and how much by the sponsors?
As at 7 February 2008, the sponsor has 30.13% of FSL Trust units with the rest held by substantial unit holders and the public.
How do the performances compare with shipping trusts listed elsewhere?
Based on a DBS Vickers research report published on 4 July 2008, the US-listed comparables are currently trading at yields of 9.1% and 9.5% for FY2008 and FY2009 respectively. By comparison, the three Singapore SGX-listed shipping trusts are offering yields of 11.4% and 12.0% for FY2008-2009 with a significantly higher spread of 786 bps to the Singapore 10-year bond yield of 3.59%. We believe that the yield gap between the US-listed peers and Singapore-listed shipping trusts should close over time.
How does a shipping trust company like yours try to maximum returns or payouts to shareholders while minimising risks?
FSL Trust grows its Distribution Per Unit (DPU) by acquiring and leasing vessels that are immediately accretive to DPU. The trust has paid out 100% of its distributable amount since listing.
Our portfolio is diversified across customers and sub-sectors of the shipping industry and its internal risk policy is intended to ensure that the risk profile of the portfolio is not concentrated on any particular lessee or sub-sector.
The long-term objective of FSL Trust is to limit the exposure of any single customer to no more than 25% of its revenues and any single shipping sub-sector to no more than 40% of its revenues although there may be deviations from these limits in the short-term as FSL Trust grows its vessel portfolio.
Who are your main customers and how diversified is your operations? What do you consider your strengths?
Our main lessees include major shipping lines like Yang Ming and Evergreen of Taiwan, Geden Lines of Turkey, James Fisher of the UK and Groda/Rosneft of Russia.
Our portfolio is diversified across customers and sub-sectors of the shipping industry and its internal risk policy is intended to ensure that the risk profile of the portfolio is not concentrated on any particular lessee or sub-sector.
The charts below show FSL Trust's revenue breakdown by lessee and vessel type as at 30 June 2008.
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We consider the following as our key competitive strengths:
- Well-positioned in a growing non-tax driven ship leasing market
- Flexibility in structuring transactions
- Strong commitment of Sponsor and substantial unit holders
- Extensive shipping expertise and wide networking contacts
- No conflict of interests with potential lessees
- Competitive capital structure and cost of capital
Why do shipping lines lease from you rather than owning a vessel outright especially if they are big shipping lines?
Leasing offers:
- 100% financing to shipping lines whilst, conventional ship mortgage financing can offer only up to around 75% financing;
- Off-balance sheet treatment;
- Funding diversification; and
- Cost of leasing is attractive compared to the shipping operator's weighted average cost of capital (WACC).
What are your growth plans for the future? How do you fund them? What is your gearing like?
The principal objective of FSL Trust is to be the world's leading leasing provider on a bareboat charter basis in the maritime industry, and to provide unit holders with long-term, regular and predictable distributions from its portfolio of modern and high-quality vessels.
To achieve this, the trustee-manager will focus on the following strategies:
- Drive rapid growth in the portfolio
- Focus on long-term bareboat charters
- Maintain high quality and modern asset portfolio
- Maintain a disciplined approach to portfolio and risk management
- Maintain a conservative capital structure
- Customize asset redeployment strategy according to prevailing market conditions
The trustee-manager's objectives in relation to capital management are to maintain a conservative financial leverage with a target debt-to-equity ratio of about 1:1, although there may be deviations from this in the short-term arising from timing differences in equity and debt capital raising for new acquisitions.
The trustee-manager aims to fund the initial growth of FSL Trust through debt with the objective of minimising the overall cost of capital of FSL Trust. It intends to diversify the sources of debt funding, and may supplement bank debt with debt from the international capital/bond markets. This would enable FSL Trust to maintain its competitive position in the industry and support long-term cash distributions to unit holders.
Will cash flow distribution be affected by acquisitions of new vessels since this a capital-intensive business?
The trustee-manager aims to acquire vessels on a DPU accretive basis i.e. each vessel acquisition would result in increasing the cash flow distribution to unit holders.
How do the rising prices of oil and steel affect your business? How do you plan to keep operating costs down for example against rising costs?
Oil and steel rates, or the volatility of them for that matter, have no direct impact on the Trust as FSL Trust is NOT a ship operator, but rather, a ship financier. The risks of operating a vessel are borne by the lessee. For FSL Trust, it receives the lease payments as agreed in the lease agreements regardless of the cost of operating the vessels.
How about slowdown in global trade as a result of US slowdown and higher commodity prices – how will it affect your business?
There is no direct impact on the Trust as FSL Trust is NOT a ship operator, but rather, a ship financier. Our leases are structured on a "hell-and-high-water" basis in which lessees are contracted to pay us the respective monthly rentals regardless of whether the ships are employed or docked.
If you own the ships – wouldn't you be also liable to the risks of higher insurance costs, as well as losses due to a vessel being lost at sea to a storm or hijacking by pirates?
FSL Trust leases out vessels on a bareboat charter basis to the international shipping industry. Unlike other providers who lease vessels on a time charter basis, FSL Trust is not responsible for any vessel operating expenses such as crew, fuel, maintenance and including insurance for the entire tenure of the lease. It also does not warrant the performance of vessels. Lessees are required to obtain the appropriate insurance for the vessels they lease from FSL Trust.
Q&A: Pacific Shipping Trust (PST)
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Can you give a brief description of your operations?
We are a structured finance company primarily involved in bareboat charters, sale and leaseback, and finance leases of containerships, as well as other vessel operating within other selected sectors. Through the long term contracted charter revenue, we aim to generate stable and consistent cash flows to support the payout of steady, accretive, and tax-exempt DPU to the unit holders on a quarterly basis.
How much of your stock is owned by public and how much by the sponsors?
Our IPO sponsor, Pacific International Lines (PIL) holds an aggregate of 34.71% of the total units issued as at 30 June 2008.
How does a shipping trust company like yours try to maximum returns or payouts to shareholders while minimising risks?
We aim to secure accretive medium/ long-term charter contracts for the vessels within the fleet. Whilst generating favourable return (at an average yield of 10%), through paying of at least 90% of the distributable income, we are able to pay down considerable portion of the debt financing. as this. By paying down this debt, we are able to preserved Net Asset Value for unit holders, and to minimise the risk of being highly exposed to residual value and refinancing requirements, especially in event of a market downturn.
Who are your main customers and how diversified is your operations? What do you consider your strengths?
We aim to enter into charter contracts with companies that are financing sounds and have conservative business models, such as PIL and CSAV (both of which are top international shipping lines). By having PIL as both our sponsor and customer, we are able to tap on their expertise in the container segment, which will remain as one of our few focused sectors.
Why do shipping lines lease from you rather than owning a vessel outright especially if they are big shipping lines?
Shipping trusts have become an alternative source of financing in the industry today. Through entering in to charters with PST, shipping lines are able to better manage their exposure to asset values and their balance sheets.
What are your growth plans for the future? How do you fund them? What is your gearing like?
Our growth plan will be built on three potential sources of vessel acquisitions:
- The pipeline of vessels under our right of first refusal agreement with our major unit holder - PIL
- Acquisitions of vessels from third parties;
- Acquisition asset portfolios. We believe the current uncertainties in the financial markets and the expected downturn in general business sentiment could throw up yield-accretive opportunities and we intend to position ourselves to explore and exploit such opportunities.
We intend to fund future acquisitions with debt and equity, the mix, the timing and the size of each will depend on market conditions prevailing at that time. We believe we have a strong financing position. We have no urgency to tap capital because we still have adequate debt capacity.
Our Loan To Value (LTV) is currently at 46%. By the end of the year, it should be about 60% when we will have 12 vessels in operation. Over the long-term we expect our average LTV ratio to fluctuate between 50% and 60%.
Will cash flow distribution be affected by acquisitions of new vessels since this a capital-intensive business?
Shipping is a global industry and any deals we do will be driven by prevailing market conditions.
We will continue to make sure that acquisitions are done at market price and they are accretive in that the DPU to unit holders will continue to increase as a result of the acquisitions. Bear in mind that it is the mandate and challenge of the trustee manager to grow the trust by making accretive acquisitions that will increase overall distributions to unit holders.
As the size of the portfolio grows, PST It is also important to grow in size so we can come under the radar screen of the bigger fund managers. This will allow our existing unit holders potential upside not just in terms of DPU but upside in terms in unit price.
How do the rising prices of oil and steel affect your business? How do you plan to keep operating costs down for example against rising costs?
Whilst PST is not a shipping company and does not operate its own vessels, it is insulated from direct fuel price impacts. Our 10 vessels are chartered out on a long-term bareboat basis and therefore the current high oil prices will not affect these vessels. For 2 of our new vessels, which are on a 5-year time charter basis, the financial impact will be minimal as fuel costs are borne by the charterer and not the owner.
How about slowdown in global trade as a result of US slowdown and higher commodity prices – how will it affect your business?
Since PST's current fleet is focused on containerships, we are not involved in carriage of commodities. Whilst the cost of commodities might have near term impacts on the cost of production the cost competitiveness of China, as well as the negative effects on consumptions, the container trade is expected to grow in the medium/long term. We will expect the fundamentals of the container sector to remain healthy and we do not expect world trade to cease growing. Nevertheless, we expect a softening in the shipping markets towards the end of the year, but as we have also locked in our charters over the long term, the impact on our business is minimal.
If you own the ships – wouldn't you be also liable to the risks of higher insurance costs, as well as losses due to a vessel being lost at sea to a storm or hijacking by pirates?
Since majority of our fleet are on bareboat charters, the charterers are responsible for the insurance costs, our financial exposure to loss at sea or hijacking is minimised.
Q&A: Rickmers Maritime Trust
Why list on the SGX?
Rickmers Maritime's sponsor, Rickmers Group, looked at several exchanges for a possible listing. Every exchange has its advantages, but Singapore stands out due to a number of factors. For one, the Singapore government has put in place strong incentives to propel its marine industry forward, and we believe Singapore is well placed to become the maritime hub in Asia with schemes such as the Maritime Finance Incentive, in addition to its excellent infrastructure and workforce.
Proximity to our current and potential customers is an added advantage, particularly when most of the top 20 global container shipping companies are based in Asia. Furthermore, the Rickmers family has been conducting business in Asia through generations and has been acting as agent in Germany for a number of Asia's leading shipping companies. Rickmers Maritime is therefore the next progressive step towards strategically cementing the Group's presence in the region.
How much of your stock is owned by public and how much by the sponsors?
Rickmers Group owns 33% of Rickmers Maritime's stock while the rest are held by the public. 40% of the units owned by the Rickmers Group are subordinated, with a three-year lock-up period from IPO.
Can you give a brief description of your operations?
Rickmers Maritime is a shipping trust formed to own and operate large containerships under long-term, fixed-rate charter contracts to leading container shipping companies. Our objectives are to offer first class services to our customers, grow our fleet, provide stable and growing cash flows and maximise value for our unit holders.
Rickmers Maritime had an initial contracted fleet of 10 high-quality and modern containerships of between 3,450 and 5,060 TEU as at IPO in May 2007, and has since contracted an additional 13 vessels, four of which at 13,100 TEU each are among the world's largest. Correspondingly, our fleet capacity is set to expand over 220% to 131,560 TEU once all the 13 vessels are delivered. A total of 11 vessels are currently in operation, following the delivery of the first of our additional contracted fleet MOL Dominance in June 2008.
Managed by Rickmers Trust Management Pte. Ltd., the Trust aims to provide unit holders with regular quarterly cash distributions, while reinvesting a portion of our operating cash flow, to ensure long-term growth and sustainability. Rickmers Maritime is sponsored by the Rickmers Group, which is based in Hamburg, Germany. Rickmers Group was founded and is controlled by Mr. Bertram R.C. Rickmers, whose family has nearly 175 years of experience in the shipping industry.
How does a shipping trust company like yours try to maximum returns or payouts to
shareholders while minimising risks?
Our objective is to provide unit holders with regular quarterly cash distributions while ensuring sustainability, and grow our fleet through accretive acquisitions in order to increase distributable cash flow per unit. With our fleet expansion programme, we intend to increase our distributions as the new vessels are being delivered.
Rickmers Maritime minimises risks to shareholders through a number of ways. Firstly, we concentrate on the traditionally more stable containership sector. Secondly, all of our vessels are secured under long-term, fixed-rate charter contracts with leading container shipping companies, in which default risk, if any is minimised.
Who are your main customers and how diversified is your operations? What do you consider your strengths?
All our customers rank among the world's largest and most experienced names in the global container shipping industry. These are A.P. Moeller-Maersk, CMA CGM, Evergreen, Hanjin Shipping and Mitsui O.S.K. Lines.
We believe our key strength lies in our strong sponsor – the Rickmers Group is a well-known and respected name in shipping. Having been in shipping for nearly 175 years, the Rickmers family represents a strong brand built on decades of dedicated service and safety. Rickmers Maritime can leverage off the strong reputation the Rickmers name represents.
The trust's long-term, fixed-rate charters agreements are concluded with reputable container liner shipping companies, which gives Unit holders a lot of certainty in terms of cash flow. The start and end dates of the charters periods are staggered, so as to reduce any concentration risk.
Other competitive strengths include our Right of First Offer (ROFO) and non-compete agreements signed with the Rickmers Group, strong and established customer relationships with leading container liner shipping companies, a fee structure that is aligned to unit holders' interests and an experienced management team. Rickmers Maritime also reinvests a portion of our distributable cash flow to ensure the sustainability of the trust over the long term.
Why do shipping lines lease from you rather than owning a vessel outright especially if
they are big shipping lines?
Container liner companies use Rickmers Maritime's vessels to complement their fleet and fulfill their global carrier service obligations. Owning a vessel is a capital-intensive commitment. Hence, there is a growing global trend for liner companies to lease ships on a long-term charter basis, which enables them to deploy their capital to other areas of their business.
What are your growth plans for the future? How do you fund them? What is your gearing like?
Since listing on SGX in May 2007, we have expanded our initial portfolio of 10 containerships by acquiring another 13 vessels, the last of which will be delivered in 2010. As part of our growth strategy, the Trust seeks to make further acquisitions that will be accretive to unit holders. We expect to finance the acquisitions through a combination of debt, equity and available cash reserves.
Given the current market conditions, we prefer to tap the debt market rather than issue new units. We have succeeded in securing new credit facilities amounting to US$627.5 million with leading international banks, which we believe underscores our sound credit portfolio of visibility of earnings from long-term charters and strong credit worthy counter parties. Our debt to equity ratio as at the end of March 2008 was approximately 44:56%, which is considered conservative for business structures such as ours.
Will cash flow distribution be affected by acquisitions of new vessels since this a capital-intensive business?
Rickmers Maritime has committed to a regular distribution policy of at least 2.14 US cents to unit holders and has in fact raised this to 2.25 US cents from Q2 FY2008 onwards. Acquisitions of new vessels are made on the strict basis that they are yield accretive i.e. distributable cash flow or our ability to distribute cash flow per Unit rises due to the acquisition of new vessel. We take great care in considering the capital outlay for each new vessel acquisition.
How do the rising prices of oil and steel affect your business? How do you plan to keep operating costs down for example against rising costs?
Most of Rickmers Maritime's vessel operating costs are locked in, with the exception of some items, such as the cost of lubricant oil. However, the exposure to variable costs is small. The trust has locked in a significant portion of costs in 2008 and 2009. We also benefit from having a very young fleet consisting of large container vessels where the operating costs represent a highly predictable and relatively small portion of our revenue.
How about slowdown in global trade as a result of US slowdown and higher commodity prices – how will it affect your business?
Both the global slowdown in trade and higher commodity prices do not have a significant impact on Rickmers Maritime. Thanks to our strategy of securing long-term, fixed-rate time charters for the vessels, our income is locked in over the next few years.
Rickmers Maritime will however continue to add accretive acquisitions to the fleet portfolio in order to achieve the objective of increasing distributions for unit holders. We will also continue to carefully arrange the duration of the charter periods of each vessel so as to reduce the concentration risk of several of them having their charter contracts expiring at the same point in time. This is a proactive measure to mitigate any vulnerability to any cyclicality of the containership market.
Analysts' Views
First Ship Lease Trust
OUTPERFORM (Cazenove)
First Ship went public in March 2007 (US$0.98/S$1.50 per unit) with a fleet of 13 vessels and has since announced the acquisition of an additional 10 vessels. By late 2008, the value of the fleet would reach US$1bn, more than doubled that of its fleet at IPO. All its vessels have secured fixed rate charters of at least seven years with shipping companies such as Evergreen, James Fisher, Berlian Laju, Groda, Scholler and Siba Ships. By end_2008, its fleet would include product tankers (9 vessels), containerships (7), chemical tankers (3), bulk carriers (2) and crude carriers (2). Based on its announced fleet expansion plans, we expect the quarterly dividend per unit (DPU) to rise from 2.13 US cts in Q2 2007 to 3.41 US cts by Q4 2009. This represents DPU growth of 60% and we expect an average yield of 14.4% pa over the next three years. Our S$1.50 fair value is based on a 2009E P/CF of 8.0x.
BUY (DBS Research)
First Ship Lease Trust announced a distribution of 2.80 US cts per unit for 2Q08, which is in line with our expectations of 2.77 US cts per unit. This is 8 % higher quarter-on-quarter (q-o-q) and 28% higher year-pn-year (y-o-y). The total distribution amounts to US$14m and represents 100% of distributable cashflows. Revenue for 2Q08 came in at US$20.7m, up 71% y-o-y. DBS Research maintains DPU forecasts for 3Q08 and 4Q08 at 3.05 UScts and 3.07 US cts, respectively. FY08 yield is expected to be 12.8%. Maintain Buy; target price S$1.65.
Hold (OCBC Research)
First Ship Lease Trust (FSLT) ) posted a strong set of 2Q results, largely in line with our estimates, driven by the acquisition and delivery of four vessels worth US$280m over the quarter. FSLT will pay out 2.8 US cents for the quarter, up 22% YoY and 8% QoQ. The aggressive spate of acquisitions also means that FSLT’s debt-to-equity level has shot up from 0.36x last quarter to 1x in 2Q, and will further increase with the fifth vessel buy. More debt-funded buys on current equity levels may not be as DPU accretive as seen previously as lenders may now require the new debt to be on immediately amortizing terms or at a higher cost of debt. We remind investors that FSLT's high yields are driven by an aggressive payout strategy. Unlike the other SGX-listed shipping trusts, FSLT does not retain any cash to replenish depreciating assets or to pay down debt. Maintain HOLD and S$1.20 fair value estimate.
BUY (UOBKayHian)
We continue to like FSLT for its stable and visible distributions which are supported by its long bareboat charters which have an average remaining lease term of approximately 9 years. The staggered redelivery of its diversified fleet of tankers, bulkers and containerships also helps to mitigate risks associated with the cyclical nature of shipping. With the completion of the acquisition of the second Yang Ming vessel, management is guiding for a DPU of 3.05 US cents per quarter from 3Q08 onwards, implying an annualized yield of 12.9%. We maintain our BUY recommendation on FSLT with a target price of US$1.24 (S$1.61) based on a
yield based target of 9.0%.
Rickmers Maritime
OUTPERFORM (Cazenove)
Rickmers Maritime, which went public in May 2007 (priced at S$1.57 per unit) offers long-term time charter of containerships. It has the advantage of a young fleet (10 containerships with average age of one year) and a strong new build pipeline which will expand the fleet to 23 vessels by Q3 2010. All its vessels have secured fixed rate charters of at least seven years with leading liners such as Maersk, CMA CGM, Mitsui OSK, Hanjin and Italia Marittima. Based on the confirmed new tonnage, we expect the quarterly dividend per unit (DPU) to rise from 2.14 US cts in Q3 2007 to 3.07 US cts by Q4 2010. This represents DPU growth in excess of 40% including assumptions of new equity fund raising over the next three years. We expect an average yield of 12.8% pa over the next three years. Our S$1.45 fair value is based on a 2009 P/CF of 8.2 times.
BUY (Citigroup Research)
Rickmers Maritime presents compelling value at current levels based on the fact that its fleet is locked into long term charter rates. This means that it can support its strong 11% dividend yield and also that it will be much less affected by near-term weakness than other owners. Our target price of S$1.50 is based on a 2008E target dividend yield of about 8%. We believe Rickmers deserves such a dividend yield approach based on the stable nature of its cash flows, backed by long term charters, and the yields of similar long term charter models in the US such as Seaspan and Danaos yielding around 7% currently. We approximate a higher relative yield due to Rickmers' relatively less liquid status and its lesser investor familiarity vs. these US peers. We also consider the trust's NAV based on market prices for the ships it owns. At our target price Rickmers would be at a 25% premium to its current NAV, though value could change as the company continues to acquire assets.
Buy (OCBC Research)
Rickmers Maritime (RMT) has kicked off a three-year acquisition spree costing US$1.35 billion, with the delivery of 4250-TEU containership MOL Dominance in early June. RMT plans to fund the contracted acquisitions using a combination of retained cash, debt and equity. RMT has already arranged for about US$627.5 million in new credit facilities on top of about US$45 million that remains unused from its IPO facility. RMT's aggressive growth plans are supported by its ability to run time charters with long-term visibility. It has credit facilities in place that can cover its growth plans for FY08 and FY09. The only question is how far the market can recover to enable RMT to successfully issue new equity at a reasonable price. Maintain BUY with S$1.22 fair value
Pacific Shipping Trust
Buy (OCBC Research)
Pacific Shipping Trust (PST) enjoyed a great 2Q, bringing home US$10m in revenue, up 16.6% YoY and 13.4% QoQ. Earnings were boosted by the two new vessels bought over 1H. For 2Q, PST will pay out 1.09 US cents a share – up 12% QoQ. We expect DPU to continue to increase thanks to the full-quarter contribution of Kota Naga in 3Q and the other two vessels coming in over 2H08. PST has been able to increase its DPU despite the reduced payout because of its new acquisitions which are more DPU accretive despite lower asset yields due to a) lower finance costs, and b) more favorable debt repayment terms. While we continue to feel a sustainable debt-to-equity level is 1x, the trust has been able to "postpone" an equity issue by increasing gearing beyond 1x in the near-term. At its current acquisition pace however, the need for fresh equity is inevitable. Maintain BUY with US$0.48 fair value estimate.
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