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 !