Monday, May 12, 2008

First Ship Lease Trust - Acquisition of 3 Container Ships for US$210 Million

This evening, FSL Trust surprised me by announcing the acquisition of three (3) container ships from Yang Ming Marine Transport Corporation, a listed Taiwan-based shipping company and the 16th largest container liner company in the world. After all, it was less than a month ago on April 21, 2008 when FSLT announced that it had acquired 2 crude oil tankers from Geden Shipping (a Turkey-based company) for US$140 million. I was not expecting another acquisition so quickly, to be frank.

With this most recent acquisition, FSLT has fulfilled its target of US$300 million of acquisitions for FY 2008, with just 5 months into FY 2008. In fact, the acquired vessels make up a total of US$350 million, which means FSLT needs to draw down on its remaining US$200 million credit facility AND arrange with its lenders to finance the remaining US$50 million. In the press release, it was mentioned that FSLT Management are trying to increase the second credit line to about US$265 million in order to acquire all 3 vessels. The first 2 have been acquired on a 12-year lease and will be delivered by end-May 2008 and end-June 2008. For the third vessel, financing and documentation has yet to be completed and assuming FSLT can complete it soon, the vessel will be delivered by end-Oct 2008.

According to the announcement, the acquisition is immediately accretive and will add US 0.02 cents for the 2Q 2008. This will raise DPU to 2.77 US cents for 2Q 2008, while DPU for 3Q 2008 will hit US 3.05 cents per unit. This is NOT factoring in the accretion from the third vessel, which FSLT will announce in due course once financing and documentation are completed. Therefore, using the DPU of 3.05 US cents per unit, we arrive at a full year DPU of 12.2 US cents. Using an exchange rate of 1.36 to the USD, full-year DPU is about 16.59 SGD cents. Based on the closing price of $1.13 this evening, the projected future yield is about 14.68%. If we factor in the potential accretion from the last vessel, we can expect an additional 0.09 US cents per share DPU (2 vessels add 0.18 US cents, so one vessel adds 0.09). Thus, full year DPU will rise to 12.56 US cents or 17.08 SGD cents; giving a yield of 15.1%.

Suffice to say that FSLT Management is being extremely aggressive in their acquisitions; with the aim being (I suspect) to increase the unit price through yield compression. The purpose of this would be to eventually issue equity to fund future acquisitions as FSLT has now reached its targeted debt-equity ratio of 1:1. Management had indicated that any subsequent acquisitions would preferably be funded by equity, assuming equity can be issued more cheaply than obtaining debt. At the unit price level of $1.13, it certainly does not make sense for Management to issue new units as the cost of equity is too high.

Thus, Management is taking a big risk that the unit price will adjust upwards significantly so that equity issuance can be done at a higher premium to the current market price. This will enable less dilution for existing unit-holders and allow the trust to "finance" itself once again. Once the debt-equity ratio falls below 1 due to equity issuance, the Trust can then turn to debt once again to continue to fund purchases; and the cycle continues. This is the best-case scenario assuming it pans out, and Mr. Market shall be the one to decide if this will occur.

Meanwhile, as a shareholder, I will continue to enjoy the higher dividends which are going to come from yield accretion. As mentioned before, I am treating FSLT as a steady dividend play with regular cash inflows (preferably increasing over time). Any capital gains are an added bonus, and I shall review FSLT again once more information on financing and Management's future plans are elaborated on in a separate press release in future.

8 comments:

Market Uncle said...

Looking at the last 3 acquisitions:

Jun 2007
James Fisher (product tankers):
DPU inc: 0.3 USD cents:
Price: 45M USD
=> 0.067 USD cents per 10M

Nov 2007
Groda (product tankers):
DPU inc: 1.512 USD cents
Price: 113m USD
=> 0.134 USD cents per 10M

Apr 2008
Geden (oil tankers):
DPU inc: 0.28 USD cents
Price: 140m USD
=> 0.02 USD cents per 10M

May 2008
YML (containerships):
DPU inc: 0.18 USD cents*
Price: 210m USD
=> 0.0257 USD cents per 10M (projected)

*accretive for 2/3 ships, 3rd one not accounted yet.

Looking at the past 4 acquisitions, if I ignore the Groda product tankers as 'one-off' jackpot, the last 2 acquisitions does not seems to be good deals.

The acqusitions came seeminly hasty and aggressive, i.e.trying to drive up their DPU at all cost, even if the deal is not that good.

You could be right that they are just trying to invoke a yield compression if the DPU is too high to be ignored.

Anyway, I'll continue to keep it as a discounted bond with increasing coupon payout. :)

Wayne Shannon said...

I think too many people approach business trusts with the wrong mentality - expecting strong capital gains when they are supposed to deliver regular income. I believe FSL still has room to take on more debt but interest will have to be amortised for new loans taken ("pay as you go"). In the end, it's a question of whether the market will come to its senses and re-rate. I note that CitySpring, another business trust, has seen its unit price go up by more than 20% in just seven weeks in the absence of any news flow.

Anonymous said...

hello mw,

may i know when is the dividend payout for pac andes?

Simon said...

i disagree with market uncle. why be aggressive when it's only in May, not even approaching half the year yet, and plunging into the deals to meet their year-end target acquisition? if u tell me the 2 deals came within wks of each other in dec, then i'll start wondering if the moves were too drastic. on the contrary, these deals are so sweet it's difficult for FSL to pass up. And im not surprised given the current credit climate.
im hoping they would increase their gearing target too given that stocks seem to be out of favour at the moment. that means even higher dividend for all of us. =)

musicwhiz said...

Hi Market Uncle,

Thanks for providing the figures, numbers and your analysis/opinions. However, I don't think it is as simple as just looking at the acquisition cost and comparing it to the yield (i.e. additional DPU) per vessel acquired.

One must also be mindful that the cost of vessels has been increasing due to worldwide inflation and higher demand compared to supply. Thus, shipping trusts have had to acquire vessels at increasingly higher prices.

I do agree that they are aggressive and trying to drive up DPU so as to invoke yield compression, but I can't say I really blame Management as they probably feel that shipping trusts, as an asset class, just isn't fully appreciated in sunny Singapore. Thus, it can be frustrating that your business is not being fairly appraised.

That said, I am comfortable with the way things are now, and just waiting for Management's guidance on the financing of the 3rd Yang Ming vessel as well as future plans for raising funds for further acquisitions.

Regards,
Musicwhiz

musicwhiz said...

Hi wayne shannon,

Yes, you are absolutely right and I agree with you fully. Shipping Trusts should be seen as yield plays giving steady, consistent income and not for aggressive capital gains. If that is the case, people might as well buy shipping companies like Courage Marine, STX Pan Ocean or Mercator.

Cheers,
Musicwhiz

musicwhiz said...

Hi Anonymous,

You're posting on the wrong topic ! Haha. Pacific Andes should be paying out dividends by end July or early August 2008, after the announcement of their full-year 2008 results by end-May 2008.

Regards,
Musicwhiz

musicwhiz said...

Hi Simon,

Thanks for providing your alternative point of view. It's always good for all of us to share different perspectives.

Anyhow, let's wait and se how FSLT Management proceeds from here.

Cheers,
Musicwhiz