Monday, March 22, 2010

Neutral on Shipping Trusts - OCBC

Singapore has 3 shipping trusts listed on its stock exchange. This include FSL Trust, Pacific Shipping Trust and Rickmers Trust. I usually try to stay away from shipping trusts as I do not really understand the business and I find it hard to convince myself to buy trusts that own ships versus a trust that own real estate. Anyway, OCBC gave a neutral view on the shipping trusts sector recently. Please see report below:

Highlights from SSW's FY09 conference call. Seaspan Corp [SSW, NOT RATED], a container-focused US-listed comparable of the Singapore-listed shipping trusts reported FY09 earnings earlier this week. Basic 4Q09 EPS of US$0.22 was three cents below consensus. SSW discussed its newbuild order book - 23 vessels will be delivered over the next three years, costing roughly US$1.8b total. SSW has been addressing the financing need on several fronts: 1) reduced dividends; 2) a US$200m preferential share issuance; 3) debt facilities. We note that while SSW is not constrained by loanto- value covenants on existing loans, access to the roughly US$270m remaining from a US$1.3b credit facility is restricted because of market value covenants. SSW has other committed debt available, however. Management estimates further equity needs of US$180-240m over a period of 18 months.

SSW optimistic on a 2-3 year horizon. SSW's management noted that line majors have done a good job managing effective supply. A primary contributor is slow-steaming - SSW said that, the number of vessels required on the Asia-Europe trade has increased from eight to 10 or nine to 11. SSW very frankly said the recent demand side pick-up was due largely to inventory re-stocking, and that the market would "normalize once the stocking is finished" and as more supply was added. It said that the current "abnormal" market would trend down but 2010 would still be much better than "2009 and even 2H08". Management was more optimistic on a longer time horizon saying rates could "reach the level of average historical amount over the next two to three years [and asset values would follow]".

Sector view intact, prefer PST. Pacific Shipping Trust, a pure container play, is not struggling with capex commitments or debt issues with no loan-to-market value covenants on its loan documents. On the flipside, it has a fairly concentrated charterer base of two, its sponsor Pacific International Lines and South American liner CSAV, which had last year requested for rate renegotiations (ongoing issue). As a result, we continue to rate PST as a HOLD. A key risk for FSL Trust, in our opinion, is that LTV covenant concerns may drive the manager to raise expensive unsecured debt. Rickmers Maritime, the other pure container play, is facing high capex commitments and LTV covenant issues as well. A positive resolution of its US$130m April loan maturity could be a turning point for the sector. The outlook for the broader ship finance industry remains uncertain, and we stay NEUTRAL on the sector.

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