Saturday, May 24, 2008

First Ship Lease Trust - Acquisitions Boost Yield to 14.8%

First Ship Lease Trust will have a potential distribution yield of 14.8%
(extracted from UOB Kayhian)

First Ship Lease Trust (FSLT) has entered into a conditional agreement to acquire

three 4,250 TEU container vessels from a wholly-owned subsidiary of Taiwan-based
Yang Ming Marine Transport Corporation (YML) for a consideration of US$210m.
The three vessels are scheduled for delivery to FSLT by end-May, end-June and end-
October this year. The vessels will concurrently be leased back to YML on a fixed basis
for 12 years.

Acquisitions significantly boost DPU. FSLT has guided that the acquisition of the
initial two vessels will be significantly accretive to FSLT's distribution per unit (DPU),
raising DPU for 2Q08 to 2.77 US cents (from 2.05 US cents) and from 3Q08 onwards
to 3.05 US cents (from 2.87 US cents).

No guidance on third vessel as funding not secured. While FSLT has not provided
guidance on the DPU accretion for the third vessel as financing has yet to be secured
(US$60m required), we estimate the potential accretion at 0.07 US cents per quarter
from 1Q09 onwards (assuming similar debt financing and charter terms as the first
two vessels). We have assumed similar charter terms for the third vessel and have
factored the acquisition into our earnings calculations. However, until the financing
terms are clear, we are not factoring additional accretion to DPU from the third vessel
into our forecasts.

The paradox: Rising DPU but falling EPU. We continue to like FSLT for its stable and
visible distributions that are supported by its long bareboat charters that have an
average remaining lease term of 9.2 years. FSLT offers investors an interesting paradox
due to its aggressive depreciation policy that depreciates its assets at 5-7% p.a. As
such, while this latest acquisition is DPU accretive, EPU has plunged as earnings after
interest for these vessels are less than the associated depreciation (2008: -65.6%,
2009: -93.3%, 2010: -93.3%). However, we remind investors distribution yield should
be the focus for FSLT and maintain our BUY recommendation on FSLT with a target
price of US$1.24 (S$1.61).

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