Thursday, January 24, 2008

FSL Trust - 4Q 2007 Financial Review and Analysis

FSL Trust is a shipping trust which acts as a finance company. It enters into sale and leaseback transactions with ship owners ("customers") and purchases the assets (vessels) from them, only to lease it back to the customers. In this way, the customers can receive immediate cash in order to expand, and also remove the asset from their Balance Sheet, thus keeping it light. I had explained this form of financing for growth before for Ezra and Swiber, so regular readers of my blog should be fairly familiar with this mode of financing by now.

For the quarter ended December 31, 2007, FSL Trust's net profit after tax was US$1.882 million against a projection of US$2.196 million (-14.3%) due mainly to higher depreciation and interest expenses incurred as a result of the acquisition of two product tankers from Groda Shipping & Transportation on November 7, 2007. The important thing to note for a shipping trust is the amount of cash generated, as this will essentially be almost 100% paid out to unit-holders (after paying fees to the trustee manager). Thus, cash flows are very important for a shipping trust and the average length of lease for FSL Trust is 7 to 9 years on average. These are on 100% bareboat charters which means the lessee (not the lessor) bears all costs of maintaining and repairing of the vessels. In a way, this helps to ensure stable and predictable cash flows which make up the high-yield.

Looking at the Balance Sheet, one can see that the amount of secured bank loans as at December 31, 2007 amounts to US$158.1 million. The trustee manager had entered into a revolving loan facility to provide up to US$250 million worth of debt and these are secured by the vessels and lease agreements and earnings as collateral. This would mean that there is still about US$92 million worth of undrawn loans with which FSL Trust can use to make further acquisitions. The loan tranches carry interest rates of 6.24% and 5.77% per annum in two tranches, but the yield FSL Trust is getting is obviously more than that, or they would not be able to pay out such high dividend yield and they also would not have taken on the debt if it was too expensive.

The cash flow statement shows that the trust only drew upon the loan facility for cash when it was necessary to make an acquisition. In this case, US$113 million was the consideration for the acquisition of the 2 product tankers, and the drawdown of loan amounted to US$114.13 million. Mr. Philip Clausius, CEO of FSLTM, said that the annual acquisition target for FSL Trust has been raised from US$200 million to US$300 million, in light of the better opportunities for sale and leaseback as a result of the global sub-prime financial mess. The good thing is that FSL Trust had indicated that their ideal debt:equity ratio target is 1:1, which means they still have US$200 million AFTER the drawdown of the current facility, in order to make acquisitions. They expect to raise these debt funds within the 1Q 2008, so I would expect Management to be on the lookout for yield-accretive acquisition targets.

The DPU for 4Q 2007 is 2.42 US cents per unit, which at the exchange rate of 1 USD = 1.43 SGD translates to about 3.46 Singapore cents per unit. When annualized, this amounts to 13.84 Singapore cents per unit and at today's closing price of S$1.08, represents a yield of 12.82%. My averaged down cost is about S$1.1333 which means my approximate yield is 12.21%. Assuming the DPU and exchange rate remain constant, it would take roughly 8 years for me to make back my principal investment. What I am concerned about, though, is that FSL Trust promised to pay out 100% of distributable income till December 31, 2007. What about for FY 2008 and beyond ? If anyone has some clue, kindly enlighten. I understand that Pacific Shipping Trust (PST) is paying out 75% of net distributable income. This means that the yield could potentially drop below 12% in the near future, ceteris paribus.

I am still in the learning phase for shippnig trusts so if any readers have further comments or insights I welcome you to post a comment, thanks !

18 comments:

java_funds said...

I tot it was Rickmers that gave out only 75% instead of PST. In any case, I think FSL is a good buy but I suggest u take a 15-20%additional discount on expected yield becoz of forex.

Anonymous said...

Has it ever cross your mind that a yield above 10% give one the idea that its similar to junk bonds?

musicwhiz said...

Hi java_funds,

Hmm, ok maybe I got it mixed up :P But I think FSL Trust will pay out 90% from FY 2008 onwards. Yes, I had factored in a discount should the US Dollar fall further (as at this writing, it is about 1.4198).

Regards, Musicwhiz

musicwhiz said...

Hi Anonymous,

Sorry to tell you this, but I can't for the life of me imagine how junk bonds and a shipping trust could be similar. Perhaps you could be so kind as to enlighten ? An objective appraisal of any investment is always encouraged, so please share your thoughts and insights here.

Thanks,

Musicwhiz

Mr ICICI said...

hey musicwhiz,

do you think FSL may have overpaid for their ships?

Do you think Swiber or Ezra may have overpaid for their ships? if not, why do you think so? Are there any ways we can check this out?

dsea said...

Hello MusicWhiz & ICICI

Two perspectives.

a) Dividend Yield of FSL trust depends on DPU & Mkt price. For now, its due to the fact that MKT prices has corrected substantially such that the dividend yield is being pushed up to abt 12%

b) My own view is that Asset yield, (ROA?), is charter revenue/purchase price. So far, revenue net of SGA expenses gives us abt 12.5 mil per quarter. Against the asset base of 609 mil, the management is extracting a CF yield of 8.5% pa

I think these 2 things are different. One is based on stk mkt price and others based on shipping rates.

Further to these, MusicWhiz, another issue still bugging me is that if the CF is fully distributed, the TRUST is not retaining any to buy future ships from Equity, but must gear up. Thoughts?

Anonymous said...

Hi, bare boats or not, i am finding the reasons for the higher DPU vis-a-vis other business trusts. could it be fsl is little known so needs attention? could it be the current economic cycle for the marine industries? ... anyway, current trends do play a big part in these trusts and not sure how long the hype will comtinue. does this fall into "long term" or you have a specific and accurate timing of getting out of fsl?

musicwhiz said...

Hi Mr. ICICI,

FSL Trust purchased the ships based on the market value of the ships as at time of transaction. Similarly, Ezra and Swiber also sold off their vessels at prevailing market rates. I guess there is always an issue of whether the trust paid too much for the assets, but the fact that they can lease them out and generate stable lease income is the most important consideration. Seeing that such leases will last 7-9 years, I am not worried in the near-term about them having to purchase more vessels to continue their distributions.

Regards, Musicwhiz

musicwhiz said...

Hi dsea,

Thanks for sharing your perspectives, very enlightening indeed as I am still learning as well !

Yes, it will be necessary for FSL Trust to gear up, which they had already mentioned in their latest press release for 4Q 2007. They intend to achieve a 1:1 debt-equity ratio eventually and they have some room left for loans to raise funds to acquire more vessels.

Regards, Musicwhiz

Ao said...

hi musicwhiz,

i was wondering how did you go about calculating the intrinsic value of FSL trust? (the price you bought in and the margin of safety that you've used)

regards,

musicwhiz said...

Hi Anonymous,

It is true, I feel, that shipping trusts in general are little understood and are not "popular" unlike high yield REITs. This is similar to the situation for REITS about 5 years ago as well. Hopefully, the general public will in time come to appreciate the high yield and steady cash flows and also to understand the risks involved in shipping trusts.

My investments are all long-term by nature and I do not have a specific time frame for exiting FSL Trust as I welcome the regular cash flows.

Regards, Musicwhiz

musicwhiz said...

Hello ao,

For FSL Trust, since it is not a company per se but operates similar to a business trust, the yield is the most important aspect for me as well as a long-term view. I did not analyze FSL Trust in the same way as a regular company, but did note its stable cash flows and chance for more yield-accretive acquisitions.

Regards, Musicwhiz

Market Uncle said...

Hi Musicwhiz,
Just happen to find that you had also analysed shipping leases.

I had done my own analysis and am still learning about it.

Please take a look at mine:
http://market-uncle.blogspot.com/2008/02/shipping-trust-comparing-fsl-and-pst.html

Mr icici brought up some valid queries that you might also find worth pondering.

In short, its the current yield sustainable and whether the shareholder returns from FSL in particular able to cover the capital deployed and cost of capital (expected rate or return).

Look forward to your views. Thanks!

java_funds said...

MW,

pls note that FSL's distribution is based on operating cash flow which is BEFORE depreciation charges and only services the interest portion of their debt.

Despite 12% yield, your principal is eroding and their is a must re-finance deby by date (can't remember which year).

Be warned bro.

Anonymous said...

the USD weakness may erode your dividend yields.
That is why I avoid stocks in USD denominations.

Raymond

musicwhiz said...

Hi Market Uncle,

Sorry for the very late reply, but I've been reading up more on shipping trusts and FSL Trust lately to gain a better understanding. Suffice to say I do not 100% understand all aspects of the business model, and have yet to clarify certain doubts. I will leave a comment on your blog when I have more knowledge.

Thanks,
Musicwhiz

musicwhiz said...

Hello java_funds,

Yes, thanks for pointing it out. OCBC's report on FSL Trust also mentioned this and it must have been an oversight on my part that I did not fully realize this. As it is, I may consider divesting if I do not feel comfortable with the long-term prospects of shipping trusts. I do also blame myself for doing incomplete research on this before I purchased; but at the time, I did not have the views of some very experienced forumers to guide me along.

Regards,
Musicwhiz

musicwhiz said...

Hello Raymond,

Yep agree with you on that. Since I purchased FSL Trust, the USD has dropped from 1.44 to the current 1.411 but I did factor in an exchange rate of 1.30 in my computations when I purchased FSL Trust, in order to determine my yield tolerance.

The issue now is whether FSL Trust can have sustainable dividends moving forward as they have to service their debt and as mentioned by OCBC, the options and clauses in some of the long-term contracts are also not favourable to the trust. Thus, I may consider divesting and admitting that I had made an error of judgement as I did not fully understand shipping trusts; but this is subject to more reading and evaluation.

Regards, Musicwhiz