I guess this was an action which should have been taken some time back, but trust me to allow inertia and false hope to dull my thought processes, rationality and objectivity; thus causing me to delay my decision to completely divest First Ship Lease Trust (“FSL Trust”). For the record, I have completely divested my position in FSL Trust on August 3, 2010 at an average price of S$0.41125, crystallizing a realized loss of about S$14,000 (or about -64%). If dividends of S$6,300 are taken into account over the years, the actual loss from this investment stands at S$7,700 or about -35%, still nothing to sneeze about. Since I had recognized realized gains from dividends under realized gains/losses in my portfolio review, I shall now take in the full S$14,000 loss there to offset the $6,300 recognized over the years (as per proper accounting procedures).
Let me categorically state right now that even as early back as mid-2008, I was “warned” about the structure of Shipping Trusts and of FSL Trust in particular as being vulnerable and unsustainable. An expert and very detailed forum poster by the nickname of d.o.g. (Disciple of Graham, no doubt) pointed out that a shipping trust could be evaluated and valued based on a DCF (Discounted Cash Flow) basis, since its cash flows were “supposed” to be predictable, stable and consistent. When he ran the model through using an appropriate discount rate, it was discovered that the discounted cash flow value of FSL Trust was less than the share price at the time (above S$1.00). I chose to ignore that pertinent piece of advice at the time as I was indignant and obstinate and wanted to prove that the Shipping Trust model was sustainable and that the value of the cash flows would grow (through M&A of vessels) over time to render the original DCF analysis invalid. All I can say was that it was a very expensive piece of advice to ignore, and if you count in the opportunity costs of having the capital invested in FSL Trust, then the mistake is sadly compounded many times!
In some ways however, the decision to divest has been long overdue and it is actually a big relief for me to be finally rid of this investment, which has been providing perennial headaches and problems for the past 1.5 years (since the global financial crisis hit the shipping industry hard). The point here is that there is no logic or sense in holding on to a sinking ship (mind the pun) while letting your capital languish; hence I saw the opportunity to free up this capital and reinvest it into a more worthwhile company. Considering my investment in FSL Trust was made in January 2008, a time when I was in transit with regards to my investment philosophy and a “virgin” learner in the value investing field, I guess I probably made some “classic” mistakes and committed several easily avoidable cardinal sins. These mistakes have been thought-out by me and will be detailed below for future reference in order for me to learn and avoid making the same errors again.
1) Not understanding the risks fully (e.g. LTV Covenants Clauses) - One of the basic rules in investing is that you should fully understand the investment you are making, or at least the important aspects of it so that you are not caught by surprise. Apparently, I had read up on shipping trusts in a cursory way and did not delve deeply into the details of LTV clauses and interest reset clauses, which conveniently kicked in when ship values plummeted along with the crisis. There were other risks such as counter-party risk which was perceived to be low at the time because “times were good”; but which came back with a vengeance to “haunt” the Trust recently (when Groda Shipping defaulted on payment for NIKA I and VERONA I). Some investors mention that of the three shipping trusts, only FSL Trust has a full-time risk officer; but then again a risk officer is quite useless when the risks cannot be foreseen or properly mitigated! At the time the Trust was constituted, no one could have predicted the kind of severe fallout in the industry which would severely depress values of ships.
2) Under-estimating the downside, over-anticipating the upside - A classic case of investor myopia. When times are good, people (including myself) can only see clear skies and a nice breeze ahead; and no one even imagines there will be storm clouds, thunder and a lot of lightning! I recall very clearly that during the AGM for FSL Trust held in April 2008, investors were talking about “yield compression”, which essentially implied that the share price would move up to reduce the yield which was then a high 9-10%. Of course, no one could foresee that instead of the share price moving up, the yield went down instead…..
3) Overly aggressive payout (initial was 100% payout) - Warning bells should have rung loud and clear when it was declared that FSL Trust would have a 100% cash payout and not retain any cash for paying down loans at all. Back then, the loan was structured as a “bullet” repayment in 2012 and was not treated as an amortizing loan (which required regular repayments similar to a mortgage loan). This overly aggressive payout ratio meant that Management was more focused on the short-term rather than the long-term viability of the Trust, as they did not create a buffer for the Trust in case something went wrong (and true to Murphy’s Law, something DID go wrong, as we can all see from hindsight). I even recall a shareholder questioning the rationale for Management to pay out 100% while passing a resolution to raise funds through issuance of new units; and the reply given by Philip Clausius (if I recall correctly) was that Management wanted to maximize returns to shareholders. In the end, Management were forced to reduce payout ratio from 100% to 70%, then to 50% and to the current 33%. With no end in sight to the crisis, bank loans being due in 1 to 2 years time and having two vessels on the spot market instead of long-term charters, it would seem that payout ratios may dip even further in future.
4) Ships as depreciating assets; unsustainable business model which requires either fund raising or debt issuance - It has been argued on many forums that shipping trusts are inherently inferior to property trusts (known as REITS) as ships are depreciating assets whose values MUST go down over time, while properties will retain a significant portion of their value even through the passage of time. The opponents of shipping trusts feel that this makes shipping trusts unsustainable as investment vehicles as the Trust must continually raise funds to acquire new vessels which are accretive to DPU in order to sustain the payout. In time to come, this can only mean more debt to buy vessels, or else a secondary offering of securities to raise funds (which dilutes existing shareholders). A rights issue would totally defeat the purpose as a Trust is supposed to pay out cash, and not suck it back from unit-holders!
5) Loan bullet repayment in FY 2012 - On hindsight, I would conclude that the Trust was setting itself up for trouble when it agreed to a “bullet” one-off repayment of its loan by 2012. This was on the assumption that it was either able to raise enough funds to pay off the loan by then, or it could roll over the debt by posting up more vessels as collateral. Both options did not materialize and I can safely say that the Trust will now have a major headache come 2012 as it mulls over how to settle its debt obligations. They should have structured it as an amortizing loan in which they pay down the debt progressively, while reducing their payout ratio to say 80%.
6) Risk mitigation is close to impossible - Despite having a stringent screening process, a risk officer and many levels of review before selecting a lessee for their vessels, FSL Trust still experienced a client default by Groda Shipping. Its ships were arrested and had to be put up in the spot market for spot charter. Risks are very tough to mitigate in the shipping industry as the industry itself is cyclical by nature, which means that companies may seem healthy and fine during good times, but will struggle to survive during bad times. It is a known fact now that the global crisis caused several shipping companies to go bust; while NOL reported a whopping US$700 million loss in the previous financial year (at the nadir of the crisis).
7) No visibility in terms of cash flows, more costs may be incurred for lawsuit and other associated costs relating to VERONA I and NIKA I - The default by Groda Shipping was the tipping point in terms of my decision to finally divest, as this meant that there was no more reliability in the cash flows for the Trust and it should be noted that the Trust has stopped providing forward guidance on DPU. Up until 1Q 2010, they were still guiding for US 1.5 cents per unit DPU; and it was only recently that this dropped to US 0.95 cents due to the default. Other future costs may be incurred for lawsuits and guarantees to be posted on the two vessels, and this clouds the visibility for future payouts. The point of a Shipping Trust is to have predictable and stable cash flows for the unit-holder. Once cash flows become unpredictable and inherently unstable, I do not see the point for staying vested.
8) Go for sustainable yield even if it is moderate, rather than for high yield which may not be sustainable in the medium-term - Another classic mistake made by me was the constant chase for high yield, so much so that the risks are blindly ignored in the process. The key is to look for sustainable yield rather than high yield; thus I am willing to accept a dividend yield which is higher than inflation but I have to be assured it can be sustained.
9) Yield is about 4.5%, but risks are high due to leveraged balance sheet and consistent pressure from bankers (at the mercy of bankers) - The yield for me for FSL Trust has fallen to about 4.5% (using US 0.95 cents as a gauge), but with the highly leveraged Balance Sheet and the fact that the Trust is subject to the whims and fancies of bankers (for LTV Covenants, advance payments to “appease” the banks, and stuff like market disruption clauses), this makes investing in FSL Trust particularly unsettling and worrisome. In short, it does NOT give me a good night’s sleep and I can find assets which yield a similar level of dividend yield which would probably allow me to sleep much better. Hence, I can safely conclude that it was the sharp decrease in yield which has contributed to my decision to divest too.
10) Risk of DPU becoming lower in future periods due to LTV covenants, debt repayment issues and vessels on spot charter - There is a further risk of DPU further declining in the face of many uncertainties, such as LTV ratio, vessels on spot charter, and legal wrangles for NIKA I and VERONA I. Not to mention the fact that the bankers also need to be paid their interest; and the impending bullet repayment in FY 2012, all this comes together to make up a “perfect storm”.
11) Unable to raise financing during Dubai Crisis indicates lack of attractiveness - The fact that the Trust was unable to issue bonds as a result of the Dubai Crisis also indicated that they did not have much bargaining power and clout. Of course, some may argue that it turned out to be a blessing in disguise as the bonds were to have an 11%-12% yield, so how in the world could you have accretive acquisitions when you are paying through your nose for interest expenses (yes, to the same bankers, no doubt)?
12) Recent attempts to acquire a vessel have also fallen through (no potential accretive DPU acquisitions) - FSL Trust’s recent attempt to conclude the purchase of a vessel had fallen through (as per the audiocast session Q&A). This further puts a spanner in the works and reaffirms my belief that the business model is inherently flawed.
13) Relatively new business model (shipping trust), IPO was too recent and no track record or stability of performance - In fact, the only comparables were to the two (also newly listed) shipping trusts Pacific Shipping Trust and Rickmers Maritime Trust. The more established Shipping Trusts were Seaspan listed in the USA, but even then this was not a proxy for stable performance as the Trusts had all yet to undergo “hell and high water” conditions. Only if they had survived through downturns and recessions and emerged unscathed (or even stronger) can we conclude that the business model is sound and can stand the test of time.
14) Weakening USD:SGD rate also does not boost dividends once converted into SGD as dividends are declared in USD - This may sound like a minor point but it also contributed to the frustrations and resulted in lower dividends for me.
In conclusion, the above points were the culmination of much rumination, analysis and critical thinking on my part over the course of many weeks (and even months actually). I certainly will keep the above lessons in view and judiciously avoid repeating them again for my future and current investments. The capital released from the sale of FSL Trust will be deployed once a suitable investment opportunity is found.
Showing posts with label First Ship Lease Trust. Show all posts
Showing posts with label First Ship Lease Trust. Show all posts
Monday, August 09, 2010
Monday, September 21, 2009
Corporate Updates
This post is mainly to update on the corporate developments for the companies I own thus far for September 2009, as I would not like my month-end portfolio review to get too cluttered with words. I shall ease off some of the news flow in my month-end report and just briefly go through some salient points there, while highlighting other issues of interest in both the broad economy as well as Singapore-related news. In addition to posting the news and updates, I will also provide a small commentary on my views on the news and how I feel about the prospects of each Company.
Ezra Holdings Limited – On September 11, 2009, Ezra announced that they had clinched new and renewal charters for three of their AHTS vessels in the range of US$152 million. These contracts are for 5.5 to 6 years and they will make positive contributions through FY 2010 (beginning September 1, 2009 as Ezra has an August 31, 2009 year-end). Then, on September 16, 2009, Ezra announced that they had contracted for 5 ROV (Remote-Operated Vehicles) with Triton Group for US$23 million to boost their subsea division. These ROV will be deployed along with three incoming subsea-capable vessels to provide a more complete range of services for their clients. Triton will provide Ezra with ship interface engineering and installation services from its support in Singapore from September 2009 till delivery in 2Q 2010.
Comment: It is heartening to know that Ezra can still manage to clinch contracts of long duration even as the financial crisis eases and the recession shows signs of ending. The long-term nature of their contracts gives revenue visibility and allows steady cash inflows over the specified period of time, so this is good news. EOC does have vessels which have charters ending soon, so hopefully there is good news on renewing the use of those vessels (heavy lift accommodation work barge) soon. The ROV contract was a surprise as it allows Ezra to further enhance and “beef up” its planned subsea division and goes along with their July 16, 2009 news release on their “Next Lap Growth Strategy”. The complete range of service offerings which Ezra is targeting to provide means that they are better able to secure higher-value contracts with better margins as they are able to package their services into a one-stop solution for clients. Management had actually been planning this for 2 years and the execution has proceeded smoothly thus far. Of course, I would expect some hiccups along the way but Lionel Lee seems to have planned for this way in advance and has already allocated resources for these corporate moves. That said, I believe there is unlikely to be a final dividend declared when Ezra announces its results in mid-October 2009 due to the capex required for their shipyard, new vessels and now the ROV. I am also awaiting news on a possible financing structure for the Chim Sao (Vietnam) FPSO Project, in which EOC was named as a front-runner for some time back; as well as news on their gas FPSO Lewek Arunothai which has started producing gas after protracted delays.
Boustead Singapore Limited – Mr. FF Wong of Boustead had been interviewed by Reuters on September 7, 2009 and Business Times then proceeded to write an article on the interview. Unfortunately, the article was factually wrong at some parts and omitted key details which would have given the report more clarity. Boustead then proceeded, on September 9, 2009, to clarify certain aspects of the interview. The key points to note are that FF Wong mentioned a rise in revenues of about 10%, but still maintains that net profit will NOT exceed that achieved for FY 2009. Also, enquiries made of Boustead’s oil and gas division amount to S$500 million, but how much of this translates into Boustead’s order book is unknown. A potential US$5 million acquisition by Salcon was still in negotiation and due diligence stage, and not “about to be finalized” as stated in the report. On September 14, 2009, Boustead announced that they were one of only 5 Singapore companies to be included under Forbes’ “Best Under A Billion” companies (of which Ezra was also 1 of the 5). An awards ceremony will be held by Singapore Business Federation in November 2009 to honour these 5 companies. The Company also made a minor announcement of the incorporation of a 100% subsidiary in the UK called Boustead International Steam Generators Limited with an issued capital of £5,000.
Comment: From the Reuters interview, a few issues were discussed and became clearer. The Group still expects to enjoy revenue growth for FY 2010 despite the severe financial crisis, which means all divisions are still doing relatively well and holding up. Of course, profits will dip as a result of the lack of any property disposals (which had been occurring at least once for the last five financial years); but core net profit from their divisions should be either stable or will dip just slightly, unless COGS rises much faster than revenues (this is possible as there was evidence of this from FY 2009’s and 1Q 2010 financial statements). But proper cost control should mitigate the risk of this dragging down the Group’s profits by too much, and if their operational cash inflows are healthy the Group should still be able to declare a decent interim dividend in November 2009. Enquiries made of their oil and gas division amount to about S$500 million, a surprising number given the slump in oil and gas activities since oil peaked in July 2008, and I would expect some contracts to materialize in the short-term as Boustead has a solid reputation for providing services to the oil and gas industry. The most interesting news by far is Salcon’s potential acquisition of a US$5 million company dealing with waste gas treatment. Even though the company clarified that this deal was still preliminary, at least it shows that Management is actively looking out for good M&A targets which are potentially earnings accretive and can exhibit synergies with their existing businesses. Salcon also needs a boost in the arm after suffering from losses for the past few financial years; and for FY 2010 it has a chance to turn around with the award of several large projects. Knowing FF Wong’s conservative stance and that he will not waver on his criteria for acquisition, I can rest assure that Management will thoroughly review this US-based company before making any moves.
First Ship Lease Trust – OK, there’s quite a handful of news for FSLT, so I will try to summarize them here. On September 2, 2009 FSLT announced waivers on their LTV (Loan to Value) Covenants, which means the banks (their lenders) are less likely to require forced sale of vessels to meet their debt obligations. The downside is that FSLT has to pay a slightly higher interest rate on their debt and they intend to prepay more of their debt; though they claim it will not affect DPU. The next day, FSLT announced in detail the set of requirements which the banks had imposed on them in order not to breach any of the covenants. Then, the following day, FSLT dropped a bombshell by announcing a placement of up to 100 million new shares, at an issue price of 10% discount to S$0.59. Eventually, only 80 million units were placed at an issue price of S$0.525, raising gross proceeds of S$42 million. Net proceeds amount to S$40.9 million after deducting expenses and fees. The funds raised are not for prepayment of debt, but was stated as being for potential acquisition of vessels or companies holding vessels. This move increases the number of issued shares to 598,665,077, which dilutes ALL shareholders. Because of this new issue, Management declared a “stub” dividend of 1.27 US cents to be paid on October 30, 2009 to separate the existing shareholders from the entitlements of the new shareholders. The new units will start trading on September 18, 2009.
Comment: While it is definitely good news to know of the LTV covenant waivers, it was not such good news to know that interest expenses had increased. But since FSLT Management had buffered for this by reducing payout to USD 1.5 cents per quarter, this move had no further impact on projected 3Q 2009 DPU. Even with the issue of the new units, Management is confident of sticking to its USD 1.5 cents DPU for 3Q 2009. The good thing about FSLT is their diversified fleet type and customer base and that they have no capital commitments for new vessels, unlike the case of Rickmers Maritime which has to raise funds in double quick time as they had committed to buying vessels. Even though the new units issued would be dilutive to DPU, the funds raised right now could still be used to purchased distressed vessels which are DPU-accretive as there is currently still a major over-supply of vessels which will not clear for the next 2-3 years (according to reports I’ve read). Thus, the proceeds from this fund raising could potentially be used for accretive purchases in order to enhance long-term DPU and ensure stability of DPU going forward. I am optimistic that the Management team know what they are doing (having spoken to several key executives before) and that they will be able to pull a rabbit from their hat. I had mentioned before that my investment in FSLT turned out to be a mistake as I had not anticipated the sharp downturn in the shipping sector; but then no one (even the industry veterans) could have foreseen the magnitude of the crisis and the collapse in vessel values. For this, maybe I can forgive myself slightly in not adhering to my often preached mantra of “capital preservation”. I am, after all, still a novice and learning more every day about investing and analysing.
Tat Hong Holdings Limited – Tat Hong received in-principle approval for the issuance of the RCPS and on September 14, 2009 despatched a circular to shareholders with details on this RCPS and also to convene an EGM (on October 6, 2009 at Fullerton, 11:30 a.m.) to approve this move and to amend the Company’s M&A of Association. I am still in the process of perusing through this circular as most of the details within are rather technical and require a lot of reading and re-reading to fully comprehend. On September 17, 2009, the Company also announced the disposal of mining equipment belonging to PT Tat Hong Energy Indonesia. While the good news is that cash of US$19.1 million will be coming back to the Group, it also means recognizing a loss on disposal of about US$1.1 million, which will hit the Income Statement for FY 2010.
Comment: The RCPS is old news by now, and after looking through the terms and conditions for conversion, I should think that the Management must be sufficiently confident of Tat Hong’s long-term prospects and their expansion in China to be able to agree to this deal. AIF Capital is also viewed as a strategic partner with contacts and network in China, and a non-executive non-independent director Mr. Andy Tse will be appointed onto the Board of Directors of Tat Hong. He is a managing director of AIF Capital with 14 years of experience in handling private equity deals in South-East Asia, so his experience and contacts should benefit Tat Hong over the long-term. The announcement of disposal of equipment is because Management did not want to expend further cash and resources to overhaul the machinery in order to enjoy a higher rental rate; thus the decision to divest and free up the cash for other uses. I see this as a good move as Management do not drag their feet when it comes to making painful decisions to recognize a loss, as the retention of old equipment will not benefit the Group in the long-term and their cash will be “trapped” inside these assets.
Overall, corporate developments have been numerous; and this is just to provide an update and some views on the latest. Results will be released in Nov 2009 (except for Ezra's results in Oct 2009) so it will be interesting to note if business conditions have turned up since the recession has technically ended.
Ezra Holdings Limited – On September 11, 2009, Ezra announced that they had clinched new and renewal charters for three of their AHTS vessels in the range of US$152 million. These contracts are for 5.5 to 6 years and they will make positive contributions through FY 2010 (beginning September 1, 2009 as Ezra has an August 31, 2009 year-end). Then, on September 16, 2009, Ezra announced that they had contracted for 5 ROV (Remote-Operated Vehicles) with Triton Group for US$23 million to boost their subsea division. These ROV will be deployed along with three incoming subsea-capable vessels to provide a more complete range of services for their clients. Triton will provide Ezra with ship interface engineering and installation services from its support in Singapore from September 2009 till delivery in 2Q 2010.
Comment: It is heartening to know that Ezra can still manage to clinch contracts of long duration even as the financial crisis eases and the recession shows signs of ending. The long-term nature of their contracts gives revenue visibility and allows steady cash inflows over the specified period of time, so this is good news. EOC does have vessels which have charters ending soon, so hopefully there is good news on renewing the use of those vessels (heavy lift accommodation work barge) soon. The ROV contract was a surprise as it allows Ezra to further enhance and “beef up” its planned subsea division and goes along with their July 16, 2009 news release on their “Next Lap Growth Strategy”. The complete range of service offerings which Ezra is targeting to provide means that they are better able to secure higher-value contracts with better margins as they are able to package their services into a one-stop solution for clients. Management had actually been planning this for 2 years and the execution has proceeded smoothly thus far. Of course, I would expect some hiccups along the way but Lionel Lee seems to have planned for this way in advance and has already allocated resources for these corporate moves. That said, I believe there is unlikely to be a final dividend declared when Ezra announces its results in mid-October 2009 due to the capex required for their shipyard, new vessels and now the ROV. I am also awaiting news on a possible financing structure for the Chim Sao (Vietnam) FPSO Project, in which EOC was named as a front-runner for some time back; as well as news on their gas FPSO Lewek Arunothai which has started producing gas after protracted delays.
Boustead Singapore Limited – Mr. FF Wong of Boustead had been interviewed by Reuters on September 7, 2009 and Business Times then proceeded to write an article on the interview. Unfortunately, the article was factually wrong at some parts and omitted key details which would have given the report more clarity. Boustead then proceeded, on September 9, 2009, to clarify certain aspects of the interview. The key points to note are that FF Wong mentioned a rise in revenues of about 10%, but still maintains that net profit will NOT exceed that achieved for FY 2009. Also, enquiries made of Boustead’s oil and gas division amount to S$500 million, but how much of this translates into Boustead’s order book is unknown. A potential US$5 million acquisition by Salcon was still in negotiation and due diligence stage, and not “about to be finalized” as stated in the report. On September 14, 2009, Boustead announced that they were one of only 5 Singapore companies to be included under Forbes’ “Best Under A Billion” companies (of which Ezra was also 1 of the 5). An awards ceremony will be held by Singapore Business Federation in November 2009 to honour these 5 companies. The Company also made a minor announcement of the incorporation of a 100% subsidiary in the UK called Boustead International Steam Generators Limited with an issued capital of £5,000.
Comment: From the Reuters interview, a few issues were discussed and became clearer. The Group still expects to enjoy revenue growth for FY 2010 despite the severe financial crisis, which means all divisions are still doing relatively well and holding up. Of course, profits will dip as a result of the lack of any property disposals (which had been occurring at least once for the last five financial years); but core net profit from their divisions should be either stable or will dip just slightly, unless COGS rises much faster than revenues (this is possible as there was evidence of this from FY 2009’s and 1Q 2010 financial statements). But proper cost control should mitigate the risk of this dragging down the Group’s profits by too much, and if their operational cash inflows are healthy the Group should still be able to declare a decent interim dividend in November 2009. Enquiries made of their oil and gas division amount to about S$500 million, a surprising number given the slump in oil and gas activities since oil peaked in July 2008, and I would expect some contracts to materialize in the short-term as Boustead has a solid reputation for providing services to the oil and gas industry. The most interesting news by far is Salcon’s potential acquisition of a US$5 million company dealing with waste gas treatment. Even though the company clarified that this deal was still preliminary, at least it shows that Management is actively looking out for good M&A targets which are potentially earnings accretive and can exhibit synergies with their existing businesses. Salcon also needs a boost in the arm after suffering from losses for the past few financial years; and for FY 2010 it has a chance to turn around with the award of several large projects. Knowing FF Wong’s conservative stance and that he will not waver on his criteria for acquisition, I can rest assure that Management will thoroughly review this US-based company before making any moves.
First Ship Lease Trust – OK, there’s quite a handful of news for FSLT, so I will try to summarize them here. On September 2, 2009 FSLT announced waivers on their LTV (Loan to Value) Covenants, which means the banks (their lenders) are less likely to require forced sale of vessels to meet their debt obligations. The downside is that FSLT has to pay a slightly higher interest rate on their debt and they intend to prepay more of their debt; though they claim it will not affect DPU. The next day, FSLT announced in detail the set of requirements which the banks had imposed on them in order not to breach any of the covenants. Then, the following day, FSLT dropped a bombshell by announcing a placement of up to 100 million new shares, at an issue price of 10% discount to S$0.59. Eventually, only 80 million units were placed at an issue price of S$0.525, raising gross proceeds of S$42 million. Net proceeds amount to S$40.9 million after deducting expenses and fees. The funds raised are not for prepayment of debt, but was stated as being for potential acquisition of vessels or companies holding vessels. This move increases the number of issued shares to 598,665,077, which dilutes ALL shareholders. Because of this new issue, Management declared a “stub” dividend of 1.27 US cents to be paid on October 30, 2009 to separate the existing shareholders from the entitlements of the new shareholders. The new units will start trading on September 18, 2009.
Comment: While it is definitely good news to know of the LTV covenant waivers, it was not such good news to know that interest expenses had increased. But since FSLT Management had buffered for this by reducing payout to USD 1.5 cents per quarter, this move had no further impact on projected 3Q 2009 DPU. Even with the issue of the new units, Management is confident of sticking to its USD 1.5 cents DPU for 3Q 2009. The good thing about FSLT is their diversified fleet type and customer base and that they have no capital commitments for new vessels, unlike the case of Rickmers Maritime which has to raise funds in double quick time as they had committed to buying vessels. Even though the new units issued would be dilutive to DPU, the funds raised right now could still be used to purchased distressed vessels which are DPU-accretive as there is currently still a major over-supply of vessels which will not clear for the next 2-3 years (according to reports I’ve read). Thus, the proceeds from this fund raising could potentially be used for accretive purchases in order to enhance long-term DPU and ensure stability of DPU going forward. I am optimistic that the Management team know what they are doing (having spoken to several key executives before) and that they will be able to pull a rabbit from their hat. I had mentioned before that my investment in FSLT turned out to be a mistake as I had not anticipated the sharp downturn in the shipping sector; but then no one (even the industry veterans) could have foreseen the magnitude of the crisis and the collapse in vessel values. For this, maybe I can forgive myself slightly in not adhering to my often preached mantra of “capital preservation”. I am, after all, still a novice and learning more every day about investing and analysing.
Tat Hong Holdings Limited – Tat Hong received in-principle approval for the issuance of the RCPS and on September 14, 2009 despatched a circular to shareholders with details on this RCPS and also to convene an EGM (on October 6, 2009 at Fullerton, 11:30 a.m.) to approve this move and to amend the Company’s M&A of Association. I am still in the process of perusing through this circular as most of the details within are rather technical and require a lot of reading and re-reading to fully comprehend. On September 17, 2009, the Company also announced the disposal of mining equipment belonging to PT Tat Hong Energy Indonesia. While the good news is that cash of US$19.1 million will be coming back to the Group, it also means recognizing a loss on disposal of about US$1.1 million, which will hit the Income Statement for FY 2010.
Comment: The RCPS is old news by now, and after looking through the terms and conditions for conversion, I should think that the Management must be sufficiently confident of Tat Hong’s long-term prospects and their expansion in China to be able to agree to this deal. AIF Capital is also viewed as a strategic partner with contacts and network in China, and a non-executive non-independent director Mr. Andy Tse will be appointed onto the Board of Directors of Tat Hong. He is a managing director of AIF Capital with 14 years of experience in handling private equity deals in South-East Asia, so his experience and contacts should benefit Tat Hong over the long-term. The announcement of disposal of equipment is because Management did not want to expend further cash and resources to overhaul the machinery in order to enjoy a higher rental rate; thus the decision to divest and free up the cash for other uses. I see this as a good move as Management do not drag their feet when it comes to making painful decisions to recognize a loss, as the retention of old equipment will not benefit the Group in the long-term and their cash will be “trapped” inside these assets.
Overall, corporate developments have been numerous; and this is just to provide an update and some views on the latest. Results will be released in Nov 2009 (except for Ezra's results in Oct 2009) so it will be interesting to note if business conditions have turned up since the recession has technically ended.
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.
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.
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.
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.
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 !
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 !
Tuesday, January 22, 2008
Ezra - 1Q FY 2008 Financial Review and Analysis (Part 2)
Dear readers, I shall continue with Part 2 of my review and analysis. Please do note, however, that all opinions regarding valuation are subjective; while my write-up on future prospects and strategies are based on objective verifiable evidence in either the company's Annual Report, or through discussions with Management during the recent AGM as well as through IR contacts using email.
Cash Flow Statement Analysis
Cash flows from operating activities dipped to S$12.3 million for Nov 2007 as compared to Nov 2006's S$16.2 million. This is even though the net profit from core operations increased by 270% to S$16.6 million, up from only S$6.15 million a year back. The main attributable causes are because of the increase in inventories which come with increased vessels, thereby reducing cash by S$9.3 million. This was balanced off by an increased receivable from an associated company of S$13.1 million (net). Trade payables had also decreased for the 3 months ended Nov 30, 2007, resulting in a cash outflow of S$6.2 million as compared to a year ago when there was a cash inflow of S$5.9 million from an increase in trade payables. This is an area of note as it could mean that creditors are reducing their payment terms to Ezra; or it could simply be that Ezra is paying off creditors faster due to higher availability of cash resources. Interest paid also increased about 2.4 times from S$1.4 million to S$3.3 million as a result of more bank loans being taken up to finance their fleet expansion. Interest income corresponding rose as a result of them placing more of their cash in short-term deposits, while taxes paid rose because of taxes incurred in other jurisdictions which are not exempted under Section 13A of the Singapore Income Tax Act.
Cash flows from investing activities recorded a net cash inflow of S$106.8 million, and this was mainly due to the proceeds from the disposal of interest in EOC of S$200.1 million. Purchase of fixed assets took up a significant chunk of cash at S$87.9 million, and the Group also spent S$4 million investing in a joint venture company.
Financing activities saw the purchase and sale of treasury shares, which, when net off, did not give rise to much cash inflow or outflow. There was significant repayment of bills payable while loans taken from banks dropped to S$8.2 million from S$28.2 million a year ago, as it reflects Ezra's cash rich position.
Overall, there was an increase of S$118.2 million in cash and bank balances, mainly boosted by the proceeds from the listing of EOC Limited on Oslo Bors. I will be watching Ezra's cash flow from operating activities in 2Q FY 2008 (1H FY 2008) to see if it continues to be healthy.
Future Prospects and Outlook
For Ezra, they are still on an expansion mode though the scale of it is not as grand as when they were first listed in 2003 and when they won their first maiden FPSO contract in Oct 2006. Below are a list of growth catalysts for Ezra Group in the near-term:-
1) Delivery of FPSO in July 2008 - This will dramatically increase earnings going forward into FY 2009 for the Group, but it will be recognized as a 48.9% stake through EOC Limited as this asset will be held by EOC directly.
2) Development of new yard at Vung Tau - This is currently a greenfield and we can expect updates from Management on the progress of the development of this future shipyard for Ezra's ship-building, maintenance and ship repair services. This new yard is expected to reduce reliance on third-party ship repairers and hence enhance net margins.
3) Completion of Saigon Shipyard and Fabrication Contracts - Saigon Shipyard is due for completion in FY 2008 and will be fully operational by the end of the financial year. This means that it will have the capacity to take on more fabrication projects in order to boost earnings, and this is a separate growth driver for the Group.
4) Aberdeen Office - The setting up of this office is positive as it allows Ezra to seek opportunities in other markets like Africa, North America and Middle East.
5) Staff Incentive Scheme - Details of this are expected to emerge in the coming months, and Ezra needs to retain its talent pool and attract new talent in order to significantly bolster their staff strength in anticipation for their expanded fleet. Such specialized vessels require intensive training and skilled labour and S$19.1 million was set aside for this purpose of recruiting and retaining talent. Although this will increase staff costs in the long-term, it is a necessary evil due to the severe shortage of skilled personnel for the O&G industry. Ezra also have plans to set up a training school in HCMC, Vietnam in order to train the new personnel.
With the above catalysts, there is much to look forward to for the company in the next 2-3 years. I will be providing more updates whenever the company releases any news, and I will be doing an EOC review of 1Q FY 2008 results probably next week or so.
Additional Purchase of First Ship Lease Trust
Today, I increased my stake in FSL Trust at an attractive price of S$1.06 per share, as this implies a dividend yield of about 13.3% based on exchange rate of 1.44 per USD, and assuming there is no increase in the current DPU of 2.42 US cents per unit. My average cost is now S$1.133 and I will be holding this with a long-term focus to achieve good yield.
I will be writing a short review on FSL Trust in the coming days in order to assess the trust's latest results and prospects moving forward.
Dear readers, I shall continue with Part 2 of my review and analysis. Please do note, however, that all opinions regarding valuation are subjective; while my write-up on future prospects and strategies are based on objective verifiable evidence in either the company's Annual Report, or through discussions with Management during the recent AGM as well as through IR contacts using email.
Cash Flow Statement Analysis
Cash flows from operating activities dipped to S$12.3 million for Nov 2007 as compared to Nov 2006's S$16.2 million. This is even though the net profit from core operations increased by 270% to S$16.6 million, up from only S$6.15 million a year back. The main attributable causes are because of the increase in inventories which come with increased vessels, thereby reducing cash by S$9.3 million. This was balanced off by an increased receivable from an associated company of S$13.1 million (net). Trade payables had also decreased for the 3 months ended Nov 30, 2007, resulting in a cash outflow of S$6.2 million as compared to a year ago when there was a cash inflow of S$5.9 million from an increase in trade payables. This is an area of note as it could mean that creditors are reducing their payment terms to Ezra; or it could simply be that Ezra is paying off creditors faster due to higher availability of cash resources. Interest paid also increased about 2.4 times from S$1.4 million to S$3.3 million as a result of more bank loans being taken up to finance their fleet expansion. Interest income corresponding rose as a result of them placing more of their cash in short-term deposits, while taxes paid rose because of taxes incurred in other jurisdictions which are not exempted under Section 13A of the Singapore Income Tax Act.
Cash flows from investing activities recorded a net cash inflow of S$106.8 million, and this was mainly due to the proceeds from the disposal of interest in EOC of S$200.1 million. Purchase of fixed assets took up a significant chunk of cash at S$87.9 million, and the Group also spent S$4 million investing in a joint venture company.
Financing activities saw the purchase and sale of treasury shares, which, when net off, did not give rise to much cash inflow or outflow. There was significant repayment of bills payable while loans taken from banks dropped to S$8.2 million from S$28.2 million a year ago, as it reflects Ezra's cash rich position.
Overall, there was an increase of S$118.2 million in cash and bank balances, mainly boosted by the proceeds from the listing of EOC Limited on Oslo Bors. I will be watching Ezra's cash flow from operating activities in 2Q FY 2008 (1H FY 2008) to see if it continues to be healthy.
Future Prospects and Outlook
For Ezra, they are still on an expansion mode though the scale of it is not as grand as when they were first listed in 2003 and when they won their first maiden FPSO contract in Oct 2006. Below are a list of growth catalysts for Ezra Group in the near-term:-
1) Delivery of FPSO in July 2008 - This will dramatically increase earnings going forward into FY 2009 for the Group, but it will be recognized as a 48.9% stake through EOC Limited as this asset will be held by EOC directly.
2) Development of new yard at Vung Tau - This is currently a greenfield and we can expect updates from Management on the progress of the development of this future shipyard for Ezra's ship-building, maintenance and ship repair services. This new yard is expected to reduce reliance on third-party ship repairers and hence enhance net margins.
3) Completion of Saigon Shipyard and Fabrication Contracts - Saigon Shipyard is due for completion in FY 2008 and will be fully operational by the end of the financial year. This means that it will have the capacity to take on more fabrication projects in order to boost earnings, and this is a separate growth driver for the Group.
4) Aberdeen Office - The setting up of this office is positive as it allows Ezra to seek opportunities in other markets like Africa, North America and Middle East.
5) Staff Incentive Scheme - Details of this are expected to emerge in the coming months, and Ezra needs to retain its talent pool and attract new talent in order to significantly bolster their staff strength in anticipation for their expanded fleet. Such specialized vessels require intensive training and skilled labour and S$19.1 million was set aside for this purpose of recruiting and retaining talent. Although this will increase staff costs in the long-term, it is a necessary evil due to the severe shortage of skilled personnel for the O&G industry. Ezra also have plans to set up a training school in HCMC, Vietnam in order to train the new personnel.
With the above catalysts, there is much to look forward to for the company in the next 2-3 years. I will be providing more updates whenever the company releases any news, and I will be doing an EOC review of 1Q FY 2008 results probably next week or so.
Additional Purchase of First Ship Lease Trust
Today, I increased my stake in FSL Trust at an attractive price of S$1.06 per share, as this implies a dividend yield of about 13.3% based on exchange rate of 1.44 per USD, and assuming there is no increase in the current DPU of 2.42 US cents per unit. My average cost is now S$1.133 and I will be holding this with a long-term focus to achieve good yield.
I will be writing a short review on FSL Trust in the coming days in order to assess the trust's latest results and prospects moving forward.
Monday, January 14, 2008
First Ship Lease Trust - Purchase and Analysis of Purchase
I purchased some FSL Trust today at a market price of S$1.17 to add to my portfolio. After doing some research on the Internet and on forums for high-yielding stocks, I chanced upon shipping trusts. There are 3 of them currently listed on SGX, namely Rickmers Maritime Trust, First Ship Lease Trust (FSL Trust) and Pacific Shipping Trust (PST). Since this was a relatively new asset class and promised high yield, I decided to do my research to see what I could sniff out in terms of yield and returns.
Apparently, of the 3 shipping trusts, only FSL Trust works on a bareboat charter basis, which means that they are not responsible for the costs of maintaining the vessels under their care. The business model for all 3 shipping trusts is similar: buy vessels and lease them back to the shipping operators on an operating lease (usually 7 to 9 years lock-in). The trust will then collect the lease revenue, pay off the trust's management and distribute the remainder as dividends to unit-holders. What differs is that FSL Trust does purely bareboat chartering, in which the cash flows are stable and certain as they are NOT exposed to operating costs and NOT exposed to technical/vessel downtime. As a result, they are able to more or less guarantee a specific dividend being paid out of their profits as profits are more certain and predictable. This qualifies it as a "safe" investment as I do not like surprises when it comes to high-yield instruments.
FSL Trust started off by launching its IPO at US$0.98 which began trading on March 27, 2007. Initially, the trust had a portfolio of 13 vessels, of which 4 are containerships, 4 are product tankers, 3 are chemical tankers and the remaining 2 are dry bulk carriers. The average age of the vessels are 5 years old and they are leased to international shipping operators such as Evergreen Marine, Berlian Laju Tanker (which is also listed on SGX), Schoeller Holdings, Siba Ships and James Fisher. There is flexibility with regards to structuring such lease arrangements for lessees which makes FSL Trust's business model attractive. In addition, to date, FSL Trust has only utilized US$50 million out of a potential US$250 million loan facility to acquire new vessels. This leaves more room for yield-accretive acquisitions which can increase DPU (distribution per unit).
A business update by the company dated November 9, 2007 shows that they had acquired 3 product tankers on June 1, 2007 from James Fisher for US$45 million, marking their first acquisition post-IPO. In addition, there is also an option given by James Fisher to sell and leaseback a fourth vessel by June 30, 2008. The lease term is 10 years and is accretive to DPU. Another 2 product tankers were acquired on November 7, 2007 for US$113 million from Groda Shipping and Transportation for a lease term of 7 years. This acquisition is immediately accretive and we will see the effects in the upcoming 4th quarter DPU announcement due on January 16, 2008 (Wednesday).
Now for the numbers: The previous DPU for the period July 1 to September 30 (paid on November 23, 2007) was US 2.23 cents per share, thus annualized DPU based on this payout would be US 8.92 cents, or about SGD 12.67 cents using a conservative exchange rate of 1 USD: 1.42 SGD. At my purchase price of S$1.17 per share, this would represent a dividend yield of 10.82%. This is obviously much better than any REIT and bank account, and beats inflation by almost double (inflation is expected to hit 5% for 2008). The additional positives are that the trust will be looking out for more yield-accretive acquisitions to add value to shareholders, while yield plays generally do quite well during market corrections.
There are always risks to any investment, and the risk in this case is that distributions are paid out in USD, and the USD is currently on a decline, hitting 1.428 as I write this post. There is also a risk of lease rates slowing down and moving lower, thus limiting FSL Trust's capacity to acquire vessels to increase yield for unitholdings. Of course, the ever present risk is of capital loss, as in any investment which is listed on a stock exchange, but hopefully the impact can be mitigated by a higher dividend yield.
Comments are welcome and I appreciate some healthy feedback on shipping trusts in general, as well as FSL Trust.
I purchased some FSL Trust today at a market price of S$1.17 to add to my portfolio. After doing some research on the Internet and on forums for high-yielding stocks, I chanced upon shipping trusts. There are 3 of them currently listed on SGX, namely Rickmers Maritime Trust, First Ship Lease Trust (FSL Trust) and Pacific Shipping Trust (PST). Since this was a relatively new asset class and promised high yield, I decided to do my research to see what I could sniff out in terms of yield and returns.
Apparently, of the 3 shipping trusts, only FSL Trust works on a bareboat charter basis, which means that they are not responsible for the costs of maintaining the vessels under their care. The business model for all 3 shipping trusts is similar: buy vessels and lease them back to the shipping operators on an operating lease (usually 7 to 9 years lock-in). The trust will then collect the lease revenue, pay off the trust's management and distribute the remainder as dividends to unit-holders. What differs is that FSL Trust does purely bareboat chartering, in which the cash flows are stable and certain as they are NOT exposed to operating costs and NOT exposed to technical/vessel downtime. As a result, they are able to more or less guarantee a specific dividend being paid out of their profits as profits are more certain and predictable. This qualifies it as a "safe" investment as I do not like surprises when it comes to high-yield instruments.
FSL Trust started off by launching its IPO at US$0.98 which began trading on March 27, 2007. Initially, the trust had a portfolio of 13 vessels, of which 4 are containerships, 4 are product tankers, 3 are chemical tankers and the remaining 2 are dry bulk carriers. The average age of the vessels are 5 years old and they are leased to international shipping operators such as Evergreen Marine, Berlian Laju Tanker (which is also listed on SGX), Schoeller Holdings, Siba Ships and James Fisher. There is flexibility with regards to structuring such lease arrangements for lessees which makes FSL Trust's business model attractive. In addition, to date, FSL Trust has only utilized US$50 million out of a potential US$250 million loan facility to acquire new vessels. This leaves more room for yield-accretive acquisitions which can increase DPU (distribution per unit).
A business update by the company dated November 9, 2007 shows that they had acquired 3 product tankers on June 1, 2007 from James Fisher for US$45 million, marking their first acquisition post-IPO. In addition, there is also an option given by James Fisher to sell and leaseback a fourth vessel by June 30, 2008. The lease term is 10 years and is accretive to DPU. Another 2 product tankers were acquired on November 7, 2007 for US$113 million from Groda Shipping and Transportation for a lease term of 7 years. This acquisition is immediately accretive and we will see the effects in the upcoming 4th quarter DPU announcement due on January 16, 2008 (Wednesday).
Now for the numbers: The previous DPU for the period July 1 to September 30 (paid on November 23, 2007) was US 2.23 cents per share, thus annualized DPU based on this payout would be US 8.92 cents, or about SGD 12.67 cents using a conservative exchange rate of 1 USD: 1.42 SGD. At my purchase price of S$1.17 per share, this would represent a dividend yield of 10.82%. This is obviously much better than any REIT and bank account, and beats inflation by almost double (inflation is expected to hit 5% for 2008). The additional positives are that the trust will be looking out for more yield-accretive acquisitions to add value to shareholders, while yield plays generally do quite well during market corrections.
There are always risks to any investment, and the risk in this case is that distributions are paid out in USD, and the USD is currently on a decline, hitting 1.428 as I write this post. There is also a risk of lease rates slowing down and moving lower, thus limiting FSL Trust's capacity to acquire vessels to increase yield for unitholdings. Of course, the ever present risk is of capital loss, as in any investment which is listed on a stock exchange, but hopefully the impact can be mitigated by a higher dividend yield.
Comments are welcome and I appreciate some healthy feedback on shipping trusts in general, as well as FSL Trust.
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