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4Q results at a glance
First Ship Lease Trust posted its 4Q results today, 21st January 2009. DPU for 4Q will be USD 3.08 cents but will be cut to about USD 2.45 cents from 1Q 2009 onwards. i.e. Using last done price of 46.5 SGD cents and assuming 1.5 SGD to 1 USD, the yield will be cut from current annualised 39.7% to 31.6%.
Rationale behind distribution cut
It is mentioned in the press release that the distribution cut resulted from a change in distribution policy, from a target distribution of 100% distributable cash flow to 75- 80%. The reason stated was to conserve cash to reduce debt and take advantage of any potential opportunities arising from this crisis. The following is quoted directly from the press release:
Beginning 1Q FY09, FSLTM will provide DPU guidance on a quarterly basis until longer term visibility returns. For 1Q FY09, FSLTM is targeting a DPU of US2.45¢, which represents about 75 to 80% of expected distributable cash flow. The retained cash will be applied to reduction in financial gearing and potentially to funding growth opportunities when they become available.
Mr Cheong Chee Tham, Chief Financial Officer of FSLTM, said: “Given FSL Trust’s secure long-term cash flows and lack of near-term refinancing needs, we believe that we are extremely well-positioned to take advantage of attractive opportunities which we expect will present themselves in the next 24 months. Our revised payout strategy will give us the needed financial flexibility to take advantage of these opportunities and will result in a more balanced yield / growth equity story for the capital markets.
Rationale analysis
Reduction in financial gearing
A DPU cut from 3.08 to 2.45 cents meant a savings of 0.63 cents per quarter, or annualised 2.52 cents. With 501.27m units in the market, this implies a savings of 12.63m per year. Against, its current debt of about 515m, the 12.63m will seem quite insignificant. So it is quite difficult to see how this will actually help in "reduction in financial gearing".
Funding growth opportunities when they become they become available
As for "funding growth opportunities when they become they become available", what can 12.63m buy? The following summarised the recent acquisitions by FSLT:
- 12th May 2008: 3x Containerships for USD 210m from Yang Ming
- 21st April 2008: 2x Crude Oil Tankers for USD 140m from Geden Lines
- 7th November 2007: 2x Product Tankers for USD 113m from Groda Shipping
- 1st June 2007: 3x Product Tankers for USD 45m from James Fisher
With the exception of the 3 product tankers from James Fisher, the other vessels are acquired at an average price of about USD 70m. With the collapse in shipping rates, BDI from more than 10k to around 800 and container shipping rates for free, prices of ships should be under pressure (more on FSLT's loan covenant later). A check on current ship prices shows that ships are still going from a few million to tens of millions, but not many around 70m.
So if there is a fire sale, there is still a chance FSLT can acquire for a bargain.
Read more...
