Tuesday, October 13, 2009

Shipping Trusts - Underweight by OCBC (12 Oct 09)

3Q results preview. We expect FSL Trust and Pacific Shipping Trust to release 3Q09 results next week, with Rickmers Maritime following later in the season. We will be tracking: 1) performance of the trusts' charters; 2) balance sheet factors including loan-to-market-value levels and repayment schedules; and 3) how this translates to forward strategy and DPU guidance.

Maintain UNDERWEIGHT on the sector as we believe the unwinding of this leveraged play structure is still playing out. The shipping industry is still hurting and counterparty risk and aggressive leverage remains a key concern. FSL Trust [BUY, S$0.72 fair value] is our preferred pick for its diversified vessel portfolio.

FSL Trust (FSLT). In September, FSLT secured loan-to-value (LTV) covenant waivers and raised equity through a placement. As such, we expect 3Q results to be fairly uneventful relative to the other two trusts. FSLT is the only trust to have given clear guidance for 3Q09 payout: 1.5 US cents is guided for pre-placement unitholders (1.27 US cents already paid out). We expect the trust to meet its guidance. The placement proceeds are earmarked for acquisitions but it may be too soon to expect concrete news on this front.

Pacific Shipping Trust (PST). Rate renegotiation discussions with customer CSAV are now in their sixth month with no resolution achieved so far. 3Q09 revenue will likely outperform our expectations as we had priced in a rate cut from 2H09 onwards. Our view is that it is only a matter of time before some flavor of rate concession is granted. Meanwhile, PST's Board is reconsidering its payout strategy and has only said that 3Q09 payout will be no less than 70% of distributable income. This may be a significant quarter as the Board spells out its forward payout and growth strategy. PST has already outlined its ambitions to grow, but any serious attempt would require fresh equity, in our opinion.

Rickmers Maritime (RMT). RMT paid out 0.6 US cents DPU in 2Q09, and its circumstances are unchanged. We don't expect any immediate resolutions to its challenges including LTV covenant breach concerns, maturing loans, and an outstanding order book. We do not believe there is scope for DPU increase till these issues are resolved and believe it more prudent to not price in any payout. While fresh equity may be eventually necessary, loan covenant concerns create a chicken and egg situation. Like FSLT, RMT may need to secure (at least conditional) LTV waivers before it can attempt to raise equity.

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