Thursday, April 23, 2009

First Ship Lease Trust -HOLD by DBS Vickers

Steady going for now

No major surprises from FSLT in 1Q09. As per guidance, FSLT announced a DPU of 2.45 UScts, which amounts to a payout ratio of 73%. While this is lower than DPU of 3.08 UScts in 4Q08 (100% payout), actual operating cash generation in 1Q09 of US$16.9m was better than 4Q08 cash generation of US$15.4m, highlighting that the business model is still holding up well. The residual cash was utilized to prepay US$4m of loans. Meanwhile, the DIstribution Reinvestment Scheme will apply for 1Q09, and unitholders may choose to receive part or all of their distributions in the form of new units. Any reinvested income will again largely be used for loan prepayments.

Maintain HOLD, TP revised to S$0.48. Results look solid enough. While revenue was down slightly (3%) q-o-q to US$24.8m, lower interest expenses meant that net profit was up from US$0.5m in 4Q08 to US$1.5m in 1Q09. EBITDA margin also came in at a healthy 93.3%. And FSLT keeps lenders happy. Of the US$16.9m cash generated, DPU payout amounted to US$12.3m and the residual cash of US$4.6m was used towards a voluntary loan prepayment of US$4m in 1Q09. We view this move as positive, as it signals strong cash position to lenders and enables FSLT to negotiate better terms, in case any
loan covenants are breached going forward.

But we stay cautious for now. Management updated that all 8 lessees have been making full and prompt payments and no renegotiation attempts have been made till now. For 2Q09, the DPU guidance was maintained at 2.45 UScts. However, we still lack visibility about charterers’ finances, and CSAV’s recent restructuring efforts show that ship operators are not out of the woods yet. As such, we retain our HOLD call, while our DDM-based TP is revised down to S$0.48.

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