Wednesday, April 02, 2008

First Ship Lease Trust - AGM Highlights

I attended FSL Trust's first AGM for unitholders held at Marina Mandarin Capricorn Ballroom today at 2:30 p.m. There were about 30 or so shareholders and quite a few proxies appointed to vote on behalf of shareholders as well, and the atmosphere was relaxed. The Board of Directors consisted of 5 people, of mention were the CEO Mr. Philip Clausius and the CFO Mr. Cheong Chee Tham whom I had the chance to speak to. From what I gathered, the general mood of the Management was that of optimism and confidence as they knew what they wanted, and were going to go about executing their strategy to ensure yield-accretion for shareholders.

Below are the highlights and snippets from the AGM which I managed to gather (some from memory). Please note that this is NOT a comprehensive list of all that was discussed as there was more than one "camp" of people and many topics and issues were thrown back and forth. I am just summarizing what I can remember and what I feel is more crucial to understanding Management's philosophy for growing the trust and the DPU:-

1) The true underlying economic return on assets acquired is around 7-7.5% (i.e. IRR). This pertains to the higher depreciation charges for FSL's assets as compared to say, a ship owner. FSL uses a more aggressive depreciation policy compared to normal shipping companies and so the depreciation charge will be higher in the initial phase of the ship's lease. However, in time to come, assuming debt amortization takes place, the amount of finance costs will correspondingly decrease and profits will improve as a result. (Note: A shareholder was voicing his concern that net profit after tax was only about 1% of net asset value as at Dec 31, 2007).

2) A question was asked of PT Berlian Laju Tanker (BLT). Apparently BLT had a technical default on one of their debt covenents (unrelated to FSL Trust) and the shareholder was concerned about possible default risk of BLT with regards to the long-term leases signed with FSL Trust. Mr. Clausius replied that BLT was working on a de-leveraging plan and that it is true that there was a technical default; but they had done their due dilligence and BLT were fine before the lease agreement was signed. When asked if there was any recourse for FSL Trust should BLT default on their lease payments, the CEO mentioned that since FSL Trust had legal title to their vessels, they would proceed to re-possess the vessels according to the lease agreement. He also assured that the market value of the vessels is currently higher than its book value, which limits FSL Trust's risk exposure.

3) The BOD was also quizzed on FSL's target capital structure of 1:1 debt/equity. The CEO 's mentioned that it was not attractive to raise equity at 12% yield (FSL Trust's current yield) at the market price of S$1.12. Thus, the trust would have to rely exclusively on debt to acquire ships from ship operators and this debt was "cheap" at 3-month LIBOR + 120 bps. They could essentially borrow more as their Debt/Equity ratio is only 34% currently. There was a US$290 facility ready to be deployed for accretive acquisitions and this would bring the ratio to the eventual 1:1. Of course, the CEO admitted that the aim was to eventually rely on equity to raise funds in future for further acquisitions, and that he believed this could happen when yield compression occurred till yield adjusted to about 7-8%.

4) A point was brought up about the possibility of the market not recognizing the value of FSL Trust, thus all it could do was to just borrow more in order to acquire, which would bring its debt/equity ratio up much higher than the targeted 1:1. The CEO laughed and asked if the market would still accord the same unit price to the trust and let it trade at 16% yield ? He feels it will be a little ridiculous should that happen as the upcoming planned acquisition will increase the DPU per unit hence increase yield. Later on, he did mention other shipping trusts listed in the USA which were trading at yields of about 6-8% on average.

5) The CEO mentioned that shipping was cyclical and that certain classes of vessels were "popular" for certain periods of time; FSL Trust took on different types of vessels in order to diversify their risk and to ensure that they were not at risk of a protracted downturn in for example the dry bulk shipping sector. This is unlike other shipping trusts (e.g. Rickmers) which concentrates on specific types of vessels.

6) When asked about their payout ratio and whether it would still be 100%, Mr. Cheong chipped in and mentioned that the minimum payout ratio was 90%; but the question asked was whether any cash needed to be retained in the trust in order to pay off finance costs (interest on loans) as well as to prepare for the bullet repayment of 2014 when the current loan facility was due for full repayment. Mr. Clausius said that the Trust does not intend to actually pay down that loan in full as he believed in raising more funds along the way through more loans and even through equity. As a result, they would be able to re-finance the loan such that it could be paid down gradually in stages rather than the current arrangement of one bullet repayment. I assumed he meant that negotiations would take place to restructure the loan since it was only 2008 now (there are 6 more years till repayment).

7) Another shareholder asked how the Trust mitigated the risks of default and credit risk when selecting a potential lessee. Mr. Cheong categorically stated that FSL Trust was the only Trust which employed a full time risk assessment officer to assess the credit-worthiness of potential lessees on an ongoing basis. Most of the customers which FSL Trust transacts with need to have a relatively good credit record and also be prominent enough to be considered. FSL focuses more on small to medium sized shipping companies as the giants are all in the container shipping industry. This risk assessment can help to mitigate the risk of default. The worst case scenario (as mentioned earlier) was that the lessee went bankrupt or insolvent and FLS Trust would have to re-possess and re-deploy their vessel(s).

8) When asked about the prospects of the Trust getting good acquisitive deals, Mr. Clausius mentioned that the sub-prime crisis in the USA has tightened credit around the world, and that ship operators are increasingly turning to alternative forms of financing in order to lighten their Balance Sheet. Lease terms negotiated with FSL Trust offer flexibility with early buy-out options on some of the leases, and under lease accounting rules, the lessee can take their vessels off balance-sheet while raising the cash to fund future acquisitions (this is akin to what Swiber and Ezra have done which I have detailed in my earlier posts). But he did caution that there could also be a global recession which could also affect the ship operators and increase the default risk. Thus, the current crisis can be seen as a double-edged sword.

9) A question was also raised on whether there was competition which FSL Trust was up against in terms of getting good deals (i.e. against other shipping trusts or ship financiers) and how they would be able to distinguish themselves. The CEO said that competition was stiff in the time charter industry; but for bareboat chartering the competition was few and fragmented, thus he does not see a problem in competition. He also feels that increasing investor awareness through extensive marketing efforts by FSL Trust has also allowed corporate investors to better appreciate the way a shipping trust functions and how it can add value.

10) The CEO is all of 39 years old and he started the company (FSL Trust Management Pte Ltd) back in 2003. FSL was relocated from New York to Singapore and he said it was not even his initial intention to list the Trust on SGX. When quizzed on why he decided to list in Singapore and not New York where shipping trusts are more recognized, he said that in NYSE it was a case of "here today, forgotten tomorrow" when the next hot thing comes about (he is referring to rotational interest in different asset classes). In Singapore, he feels that shipping trusts are relatively new and that it can command attention due to its business model; and by being mid-cap (market cap of about US$500 million) it could also attract fund attention. I feel that his point was that by listing over here, he could capture and retain more focused attention on the Trust as Singapore had a smaller market, rather than listing on NYSE where the action was frantic and fast-paced (personal opinion).

11) He also mentioned that the older ships get higher leases but the problem was that older assets had the chance of going "out of fashion". If the tide should turn against older assets in the shipping industry, then the market value of those assets could plummet suddenly. He thus emphasized that it was important for a shipping company to have a very new and modern fleet so that even if the industry went into a slump, the company could still rely on their new vessels to generate some form of income. I was relating this statement to Ezra and Swiber; both companies are constantly ensuring that their fleet is new and up-to-date, unlike some companies such as CH Offshore (which is selling off older vessels to replace them with newer ones; albeit slowly) and Taiwan-based Courage Marine (which owns a fleet of old dry bulk carrier vessels).

12) A shareholder also brought up the point about the lessee not taking care of the vessel as it did not technically belong to them; thus in the last 2 years they would cut corners and cause the vessel to be poorly maintained. Mr. Clausius assured that there was a 5-year technical inspection (Mr. Cheong added that this was compulsory) for all vessels and that the lessee would have to pass this inspection before they could return the vessel to FSL Trust at the end of the lease period. Thus, this minimized any physical wear and tear or under-maintenance of the vessels (recall that under bareboat chartering, the lessee is responsible for the maintenance of the vessel at their own expense).

13) Mr. Clausius did not, however, assure that yield compression would SURELY take place; after all he emphasized that the market would determine the yield of FSL Trust and that he HOPED that yield compression would eventually benefit all shareholders, including the IPO shareholders who were "below-water" now. But he did reiterate that the 3 cornerstone shareholders had NOT sold out their stake. One had increased their stake a little, another had sold a little while the third had maintained his stake. Together with FSL Trust Management, they owned a total of 54% (30%+24%) of FSL Trust and the major shareholders were happy with the DPU thus far and see more potential ahead for DPU accretion.

14) Mr. Clausius had a possible explanation for the unattractiveness of FSL Trust at the present moment. The DPU is given out in USD currency and the USD is currently at its weakest against the SGD; this means that Singapore shareholders would receive a correspondingly lower SGD DPU as compared to their USA counterparts who were not affected as they received their DPU in USD. However, he said that even if the USD should weaken further, the current yield was still very attractive by any standard and the absolute DPU would increase further should the Trust make more acquisitions.

Candour and Disposition

The general mood that I could detect from the CEO was that he was candid and willing to take questions from all shareholders; he was also not evasive and did not deflect questions away. But he was cautious about being too optimistic about the Trust's prospects, as the unit price has thus far not done well. He was confident about the Trust's business model and also in his Management Team which had extensive experience and knowledge in structuring operating leases to maximise value for shareholders. This confidence shone through when he spoke to many of the unit-holders. He was also jovial and relaxed and was willing to stay for 45 minutes after the official business ended to take questions from unit-holders. Mr. Cheong was also very chatty and was explaining the business model of the Trust and various technical aspects to another group of unit-holders, but I did not stay to listen.

Please note that the FSL Trust website has mentioned that the forecast DPU for FY 2008 is expected to be 10.432 US Cents per unit. This translates to about 2.61 US cents per share, or about 3.57 Singapore cents using a rate of 1.37 to the USD. This would mean a potential DPU of 14.30 Singapore cents for FY 2008; implying a forecast dividend yield of 12.4% at today's closing price of S$1.15 per unit.

Overall, it was a very good experience to attend the AGM and to speak to Management about various aspects of FSL Trust. It remains to be seen if Management can successfully execute their long-term growth strategy for the Trust but thus far they have done better than the forecast DPU for FY 2007; so this could be an early indication of their ability to deliver.

I will be providing more updates of FSL Trust as they come around, but please feel free to contribute comments on the AGM and share information too.

31 comments:

cif5000 said...

Hi Musicwhiz,

Thanks for the very comprehensive account of the AGM. I learnt something from this read.

Are you treating shipping trust as a business when you buy the stock?

To me, shipping trust is a business for the Management but not for the unit holders. The units are more like preferred shares with variable dividend rate. The growth in the "business" will not result in the growth of the "intrinsic value" of the units.

After all, the units are just part-ownership of the ships the trust owns. From value investing point of view, my question will be "Am I over-paying or under-paying the assets less an annual management fee?"

To the management, more ships equal more fees equal more value for themselves.
To unit holders, more ships when divided over more unit holders results in no net gain. (Assuming debt is optimized)

Anonymous said...

excellent comment! but comparing FSLT with RMT (Rickmers), I am currently switching from FSLT to RMT.

1.) RMT offers nearly the same yield, but still keeps part of the cash flow for growth, so it achieves a higher [cash flow/market cap].
2.) RMT is also bigger and has a stronger parentage (identical name with "parent" and stronger parent).
3.) RMT seems to be depressed due to Citibank's constant selling around $1 (from proprieary desk), maybe due to Citi's situation, which leads to this mispricing between RMT and FSLT. This could lead to a boost in RMT once Citi is out, which could be soon, looking at the announcements.
4.) RMT has better counterparties (lessees are global Top 10)
5.) RMT plans even more growth.

musicwhiz said...

Hi cif5000,

I treat shipping trusts as a business to the extent that they can "grow" through acquisitions and thus give higher DPU. Higher DPU will result in a higher yield, thus yield compression will ensure a higher unit price which will translate into capital gains for shareholders. Herein lies the "intrinsic" value - the stream of future dividends to be received (this is as yet undetermined) discounted to the present.

Yes, of course I agree the Management benefits from this as they collect tons of fees. But this could be a case of a win-win situation because unit-holders will enjoy high yields too. You said there is no net gain, but this is assuming equity is used instead of debt (which will happen eventually). By then, either the unit price has to increase (for them to issue equity) or the absolute DPU will increase to make up for the increased number of units.

Either way, this means that unit holders who got in early would reap the benefits either in terms of DPU received over the years or a much higher unit price.

Of course, that said, this business model is still relatively new so I am still learning. So please keep your comments coming, thanks !

Regards,
Musicwhiz

musicwhiz said...

Hi Anonymous,

RMT was mentioned very frequently during the AGM.

1) RMT keeps more cash for growth, but FSL Management mentioned that it was because RMT started out with leverage already; thus they have to reduce their payout ratio to retain cash to further fund acquisitions.

2) RMT is larger because of its committed fleet from its parent Rickmers. However, note that RMT only deals with containerships and this narrow focus could be a source of risk in the event of a downturn. Rickmers also faces more competition to get good deals as they deal with time charters, not bareboat charters.

3) No comments on who's selling.

4) FSL Trust Management also addressed the issue of RMT having "better" counter-parties. This is due to the fact that companies dealing with such vessels are very large ! But the issue here is the type of assets the trust deals with and how it mitigates its risk with regards to credit and default. As I mentioned, FSL has appointed a person to do risk assessment to determine if a potential customer is credit-worthy.

5) Your last point is very vague. FSL and PST also plan more growth. I think it would be pointless for investors to invest in a shipping trust or REIT which does not plan to grow.

Regards,
Musicwhiz

Anonymous said...

Hi Musicwhiz....

Fantastic write up.

Keep it up.





DSEA

Simon said...

Hi Anonymous,

You have to bear in mind that RMT has to pay for operating expenses, and that includes manpower and bunker cost. Both costs are rising non-stop with crude oil topping US100. And apart from having to foot all these operating costs, the reason RMT doesn't have a fixed payout is the need to maintain the ships. And maintaining the ship includes incurring additional capex for the ships to comply with the ever changing shipping regulations. Hence, RMT can't afford to pay out all their earnings as they need to keep a portion of it for these costly capex. This is the real reason. It's not for growth! who told you it's for growth? These shipping trusts grow their shipping fleets via equity and debt, not by retaining a portion of their payout. Anyway, please be reminded that FSL does NOT bear these capex or maintenance costs at all. These are borne by the FSL's leasee. So the only thing FSL should be concerned with is counterparty risk. This leads us to the next point.

It doesn't matter whether you have counterparties who are 'big names' with big ships. More importantly is to have counterparties who are credit worthy and able to pay up their leases. They can lease out bathtubs if they want to, but so long FSL have done their homework with assessing their counterparty risks, i don't really care. If not, i'll be deeply disappointed and sell my shares asap. haha.

So seriously, i don't know how RMT can be better structured than FSL, at least in terms of risk mitigation. Though the USD is a big overhang for the share price..

TheKen said...

Hi musicwhiz

glad to know your investment in FSL still managed to gain 0.5% despite the big USD drop

this is interesting to me as i was also considering buying a shipping trust for its dividends

musicwhiz said...

Hi DSEA,

Thanks for visiting and for your comments.

Have a great week !

Regards,
Musicwhiz

musicwhiz said...

Hi Simon,

Thanks for your explanation(s). I guess each shipping trust has their relative merits and attractiveness. I would advise all to download OCBC's report on shipping trusts from OCBC Investment's website. That should give a good overview of the 3 listed shipping trusts and the risks involved for each.

Regards,
Musicwhiz

musicwhiz said...

Hi theken,

Yes, it is supposed to be a "defensive" play amidst the volatility. Also note that the capital gain does not include dividends already received; thus if the capital gain remains constant (or even nil) while I receive dividends at 12.5% yield, then overall it is still a very decent investment. This does not take into account possible accretive growth through acquisitions in the near future.

Cheers,
Musicwhiz

Vincent said...

Hi Musicwhiz,

I'm a 20 year old investor starting out on my dad's account. It may seem a silly question to ask, but are you personally involved in the shipping business yourself? I'm impressed by the knowledge you have on its business model.

And how does chartering companies like Jaya Holdings differ from shipping trusts? I currently hold Jaya for its potential dividend yield of about 7.5% at $1.35.

Thank you for your time and kind advice.

musicwhiz said...

Hi Vincent,

I am not involved in the shipping business and have no experience working in a shipping environment. The knowledge that I got was purely from extensive reading on the structure of shipping trusts and by talking to the Management.

Jaya Holdings will be the ship owner/operator meaning it is the customer of FSL Trust. This is similar to companies such as Ezra and Swiber who also will approach such ship financing companies to structure a sale and leaseback. I am not too sure about the business model of Jaya but if it owns vessels, then it will derive its revenue from chartering them out for usage.

The dividend yield of 7.5% is impressive, I must say !

Regards,
Musicwhiz

cif5000 said...

Hi Musicwhiz,

I think the intrinsic value of a shipping trust lies in its ability to use debt at a lower interest rate to fund the purchase of an asset that generates a higher rate of return.

The "intrinsic value" of the trust does not change significantly whether the trust is fully leveraged or running without debt, even though the dividend payout as well as the level of risk the management is taking could be different. The different dividend payouts (and hence yields) resulted in different valuations. But in my opinion, there is still minimal change to the intrinsic value of the trust.

I agree that because debt level affects yield which in turns affects valuation, these create opportunities for investors to purchase the units at depressed valuations.

Vincent said...

Musicwhiz,

Thanks for your comments, they are very helpful.

The projected 11.6% yield on FSL Trust website is REALLY impressive. However, are they bound by their nature as a trust to give a consistant high dividend payout policy, like REITs?

Thank you.

musicwhiz said...

Hi cif5000,

Interesting viewpoint which you have raised, but I can't say I totally agree with you on this. The part which I agree on is that the structure of a shipping trust makes use of cheap debt to fund purchases of vessels which are yield-accretive because they have a higher IRR than the cost of debt. Currently, cost of equity is much too high to justify issuance of equity.

But I don't agree that intrinsic value stays more or less the same. This is because FSL Trust has thus far committed only US$290 million of debt for further acquisitions, but how about for future growth ? The intrinsic value should take into account ALL future acquisitions but currently, the magnitude and method is uncertain. Thus, it is this unpredictability which makes intrinsic value estimation more hazy and indistinct. The dividends (DPU) do affect valuations and hence will also affect intrinsic value in future. A clear example would be if the trust were to grow its NAV at 3x its current value; then DPU will grow substantially. But if the trust cannot acquire anything else, then its DPU will remain the same as now. Thus, the intrinsic value will be different.

These are just my views though, and open to debate and discussion.

Regards,
Musicwhiz

musicwhiz said...

Hi Vincent,

Yes, it is stated in their dividend policy to distribute at least 90% of their cash collected. Currently, they are distributing 100% as tey do not need to retain cash for expenses relating to maintenance of ships (their vessels are 100% on bareboat charters).

Regards,
Musicwhiz

Anonymous said...

Hi MusicWhiz (& Vincent),

I tend to see the Shipping Trust and Shipping company along the following analogy.


Many ways of looking at it. Do we need to own the kopitiam/shop/stall before we set up our chiken rice stall?

If yes, then a lot of resources will be tied up in it. By "recycling" the capital, it is argued that these funds can be used for other projects like franchising or investing in other businesses....(essentially a CAPITALAND argument)

Do you want to invest in a company that owns the assets or do you want the company that runs the business (which may or may not own the assets required to run the business).

Vincent, your question abt Jaya vs FSL is thus essentially between whether you want to invest in Business vs Assets.

By investing in FSL, we are essentially investing in Assets (& of course, mgt ability to lease it to credit worthy leasees) and capability of TRUST mgt to obtain yield accretive purchases.

By Investing in Jaya, you are investing in the management and its ability to handle sales, marketing, management of ships, control costs, and slao decide whether to securitise its ships (sell and lease back)


DSEA

Anonymous said...

Shipping biz go thru cycles, current cycle seems to run forever, or is it?

Anyone looking at other biz trusts? e.g. hyfluxwater? cityspring? these trusts run human necessities such as water, gas and electricity and collect tariffs from municiple authorities, sure win at yield ranging 8 to 10%? an

musicwhiz said...

Hi DSEA,

Good way of looking at it yep. I guess the question will be which business model allows more growth ? I would think shipping trusts grow by acquisitions (not organically), while shop operators can grow either organically or acquisitively. Still, one's focus should be on high yield for shipping trust and for capital gains for the growth company; which is why I also invest in Swiber and Ezra (they are the vessel operators).

Regards,
Musicwhiz

musicwhiz said...

Hi Anonymous,

I cannot comment on other business trusts as I did not do much research on them. But from what I understand, yield is also pretty god but the question is sustainability, consistency and ability to grow DPU.

Cheers,
Musicwhiz

cif5000 said...

Hi Musicwhiz,

Resent my comment to corrent the error on the Yes/No part.

++++++++++++++++++++++++++

If I were the management of a shipping trust, what will be the intrinsic value?
1. Capability of management in utilizing capital (i.e. borrow cheap and lend dear)
2. The amount of capital (through issuing units) the trust can raise
3. The amount of leverage the trust can use
4. The amount of earnings that the trust can keep (to fund growth) and hence the amount of dividend paid

From the 4 factors, can we improve any of them without a corresponding dilution through issuance of new units?
1. Yes
2. No
3. Yes
4. Yes

You are right to say that the intrinsic value of the trust can change. My point is that any improvement on the intrinsic value will rely on:
1. an improvement on the management
2. a change in the leverage policy (to yield on the positive side, of course)
3. an adjustment of the payout ratio

I think our "disagreement" stems for the definition of intrinsic value. How intrinsic is intrinsic? You mentioned that the trust has so far committed only $290mn of debt. I agree that if the trust borrows more, it can earn more. However, the ability to leverage should already be factored in when we estimate the intrinsic value, whether or not the money has been borrowed.

To me, if a trust CAN borrow up to 50%, that figure, among others, determines the intrinsic value, whether or not it HAS actually borrowed anything at all.

If it hasn't the DPU will be lower, if it does DPU will be higher. The use of leverage affect the DPU. The ability/restriction to borrow, as defined within the trust corporate policy, affects the intrinsic value.

musicwhiz said...

Hi cif5000,

Thanks for delving so deep into this. It's been a really fruitful discussion and I've learnt a lot too !

I agree we should of course factor in the Trust's ability to leverage when intrinsic value is computed. However, I would hasten to add that in the long-term, such further debt financing is uncertain as to the amount, interest rate and duration. Thus, my point of view is that one cannot objectively estimate the amount of debt the Trust can take up during its lifetime; hence an estimation of intrinsic value would likely be based on incomplete information.

However, you are right to say that our definitions of intrinsic value may very with regards to time horizon, as well as how much debt/equity we can reliably estimate.

The use of leverage as well as equity issuance will affect the DPU, depending on whether they deploy the funds for accrestive acquisitions. The trust's corporate policy does dictate its actions in the short-term, but I am unsure if this is also governing it for the mid-to-long-term.

Your views on this, please ?

Regards,
Musicwhiz

Anonymous said...

hey guys,

battledome64 here,

did anyone take into account the subordination of units policy?

Will these dilute the par unit of each share once the subordinated units are released?

Wow...so many views. I sure hope a cost benefit analysis is done before investing.

Rgds

musicwhiz said...

Hi battledome64,

The subordination of units, yes I had taken that into account. If they outperform their DPU, then part of the payment goes to them, as stated in their prospectus I believe. The key is whether they can grow it to that level; if they do, then they deserve part of it.

I will read up more on this again to understand it better and then comment accordingly. Thanks !

Regards,
Musicwhiz

cif5000 said...

Hi Musicwhiz,

The discussion is coming to full circle. I started with "Whose business is this - Unit Holders or Trust Managers?" and then said that the trust is like preference shares. If I can add now, that means that the unit holders get LIMITED upside but ALL the downside.

- On Debt to Equity
I believe there is some information in the Trust Deed on the maximum leverage the trust can use. You may verify this as I did not get to look at it myself. A more appropriate estimate would be to look at other trusts, including those listed elsewhere. The total amount of debt cannot be estimated over the lifetime of the trust, but the debt to equity will not go too much out of proportion. And the debt to equity is what matters to the unit holders because any increase in debt without an increase in units will result in a higher ratio.

- On Interest Rates
The management must be shrewd enough to borrow (cash) cheap and lend (the ship) dear. They must also borrow long and lend long. This will "hedge" their interest rates and earn the unit holder money.

- On Equity Issuance
Each time the Trust issues more units, the trust manager benefits if he can use the funds successfully.

- On Net Distributable Amount
The trust will distribute at least 90% of the Net Distributable Amount. That means that the trust can retain only up to 10% of the profit for reinvestment. I view such terms negatively. If the trust can have a 15% return on invested capital, I would rather have my dividend reinvested. On the other hand if the return is bad, I would rather not own the units. The third option would be to use the dividend and purchase more units if the return is good. That leads to the question: What is the ROE? After all, business-like investing is about ROE.

To sum up, rather abruptly (sorry), investing in a shipping trust is really investing in a fixed income instrument. I don’t view it as a business because the interests of management and the unit holders cannot be aligned. I would look at the margin of safety from the perspective of whether or not the trust will have the financial capability to continue paying dividend (my expected return) as opposed to a discount to the intrinsic value.

PS: Apologies if I messed up your blog...I was penning my thoughts here on my learning journey to becoming a conservative investor. And these thoughts are really kinda jumba-up.

Lastly, Nice blog.

musicwhiz said...

Hmm cif5000,

Very detailed comment you have written, really had me thinking ! Don't worry you did not mess up my blog, in fact you added a lot of value !

Frankly, I do agree with you that unit holders are exposed to a lot of downside should things not work out, but not much upside. By upside I think you are referring to capital gains ? I much prefer a shipping trust to be able to give regular and sustainable dividends though, the aim is not for capital appreciation. But I understand your points about D/E ratio as well as net distributable amount. D.O.G from Wallstraits forum had also highlighted these points and he was very critical about it (he tells it as it is), saying that the only way the Trust can grow is by issuance of new units in the future and this will be dilutive to unit holders and also dilutive to DPU.

I did think that it would be a good idea to retain some cash in order to service the interest installments and to perhaps have a war chest for acquisitions; but Management seemed intent on using pure debt to finance future acquisitions. As you said, they have a reward system which gives them good fees based on the NAV of vessels + other incentives; so they do not mind taking on more debt (albeit cheaply) to grow the Trust through acquisitions. The CEO even mentioned going beyond 1:1 D/E ratio if need be, as there was nothing which said they could NOT. It was just not recommended at this point in time as it would increase interest substantially and may cause the Trust to be over-leveraged, though unlike a REIT, there are no guidelines on leverage for them.

So yes, you are spot on in saying that Management and unit holders cannot be aligned. After all, this can be likened to a mutual fund where the fund managers "help" to invest your monies, in turn collecting fees from you. For FSL Trust, this is exactly what happens too. So I am not trying to kid myself that Management is so altruistic; they are doing this also for themselves.

As for the expected dividend continuance, I would think it can be sustained until at least end FY 2009,, when the Trust must then consider how to finance future acquisitions. I am prepared to wait and see what happens and have factored in a possible loss should things not go the way I planned. Call it learning by experience !

On hindsight, perhaps I could have chanelled some money into good, growing companies but none I have identified are selling cheaply with clear growth prospects. Thus, I resorted to a yield play to beat inflation (better than letting my money rot in some bank account).

Hopefully, time will prove that I did the right thing. But if not, at least I learnt a valuable (though costly) lesson !

Regards,
Musicwhiz

Market Uncle said...

Hi Musicwhiz,
Glad to know you attended the AGM. According to point 2, you disclosed that "...PT Berlian Laju Tanker (BLT). Apparently BLT had a technical default..."

1) Are you able to find any other "public" information on that? I couldn't it in the Annual Report or Annoucements so far. If I can't find the info in the upcoming statment on wednesday, I might email FSL, but dunno whether they'll reply.

2) Given that BLT contributed about 21% in terms of revenue to FSL, and factoring the recent purchase of 2 crude carriers, I wonder whether the increase in profit from these crude carriers can make up for the lost in revenue from the chemical carriers to BLT.

Will like to see your comments on this. Thanks!


Market Uncle
(hiaz, got only limited leave, so can only attend the AGM of companies with, or going to brew problems. ;)

Vincent said...

Hi Musicwhiz and cif5000,

I really learned a lot from you guys, but can still i ask a very basic question?

Just read FSL's Q1 report and im rather puzzled that they positively adjusted depreciation expenses back into the net distributable amount.

But by doing so, aren't they effectively paying out their own asset value?

I'm a new investor so still trying to understand the mechanics involved. Thanks for your time.

Market Uncle said...

Hi Musicwhiz,
Regarding issue of PT Berlian Laju Tanker (BLT)'s technical default on one of their debt covenants at the AGM, potentially affecting its lease payments, the closet official information I can find is:

15 April 2008 - CLARIFICATION ON THE NEWS IN THE PUBLIC REGARDING THE LETTER OF
NOTICE FROM IDR BONDS TRUSTEE
The Board of Directors of PT Berlian Laju Tanker Tbk wishes to clarify various news circulating in the public regarding the Company’s breach of the financial ratios following the issuance of the notice of breach for the Company’s IDR Bonds from PT Bank Niaga Tbk (the “Trustee”) dated 17 March 2008


more detail:
http://202.55.170.21/FinanceData/SGX_Filing/SGX-Letter_16_April_2008.pdf

src:
http://www.blt.co.id/investor/default.asp?act=investor&id=21&id_cat=1

musicwhiz said...

Hi Market Uncle,

The only public information is the announcement you posted on BLT. Thus far, FSLT Management has reiterated that it is merely a technical default and does not amount to significant counter-party risk. They did stress that their risk officer was well-equipped to assess risk of this nature and though this was an "unfortunate" incident, it does not in any way mean that BLT will not be able to service their lease obligations to FSLT.

As for the crude oil tanker purchases, I think they will add significant accretion to DPU; but as someone pointed out the lease terms are not too favourable for long-term in that the first buyout option is 4 years from the start of lease, which means that FSLT could potentially "lose" these vessels in the fourth year (i.e. FY 2011). But it is still too early to be able to determine if this is good or bad as anything could happen from now till FY 2011 and I am curious to see how shipping trusts will turn out. I can probably conclude that I may not enjoy significant capital gains from investing in FSLT but will certainly enjoy the good dividends ! Haha....

Thanks for commenting, and take care !

Regards,
Musicwhiz

P.S. - Don't worry, I am also trying to attend all the AGM but not easy too due to work commitments. :)

musicwhiz said...

Vincent,

Yes you are right. Part of the DPU comes from a return on capital as the ships within a shipping trust depreciate; while the rest of the DPU is paid from the lease rentals which FSLT collect.

For more info, check out OCBC Research's report at www.ocbcresearch.com (I think it's a Nov 2007 report).

Cheers,
Musicwhiz