First Ship Lease Trust - Back to Earth

2Q 2009 Results

First Ship Lease Trust, FSLT announced its 2Q 2009 quarter results on 21st July, 2009. Forward DPU forecast came in at 1.5 USD cents, much lower than the 3.08 USD cents ever announced. Rather then feeling disappointed, I felt reassured of my investment instead. The forecast of 1.5 USD cents DPU was arrived at by setting aside 50% of free cash flow to pay off debt, rather than distribute to shareholders. This, in itself, is more prudent and sustainable in keeping FSLT afloat.

Impact on FSLT

The following table illustrates the impact of DPU cut and the increased voluntary debt payment will have on FSLT:

Assuming 50% of operating cash flow is used to pay off debt totally, the amount of outstanding debt by 1Q 2012 (first bullet payment becomes due) is reduced by 20.62% to 395m USD. The value-to-loan ratio will have been 175%. Interestingly, the current loan-to-value ratio is 176%. Against the value-to-loan covenant of 145%, seems to me 30% is the comfortable margin the management intends to maintain.

If so, unless FSLT is slabbed with higher interest rates by the lenders, chances for further cut in DPU is unlikely.

Personal Performance

So what does the cut in DPU mean to me, as a shareholder? The following table illustrates my own valuation of FSLT on my portfolio:

From a huge paper loss when FSLT plunged way below 40 cents in March earlier this year, the share price of FSLT had recovered to paper gain for me (factoring dividend payout so far). As shown in the projected future payouts using 1.5 USD cents as a guide, my investment in FSLT will only remain barely profitable, unless the equity value improves instead of decline (factoring dividend payout) as projected.

The missing piece

Cutting the DPU and making higher loan repayment is only one critical step in the right direction. If the managment is really sincere in creating value for shareholders, more had to be done.

Firstly, once the share price recovers to a more realistic value, say 87 SGD cents (10% annualised yield), the management should seriously consider a rights issue to clear the debt and make DPU accretive acquisitions again given current down-to-earth valuation of ships. The dilutive effect will be significant, but it will go a long way for supportive shareholders who does see a future for FSLT beyond 2012.

Secondly, once the credit market resume back to 'normal' before the subprime induced credit crisis, the management should re-negotiate a more realistic and sustainble amotizing debt repayment scheme with the lenders.

Conclusion

Now that FSLT is back to earth, it should seriously consider making more earthly decisions to grow FSLT in a more sustainable and profitable fashion. Just like Tsit Wing, I hope to make good money (ROI), not merely breakeven. For now, I still see a potential in FSLT.

Returns on Investment

Joke

I came across the following phrase (can't recall the exact words but should not be too far off) via some SMS joke:

人生最遗憾的事是人死了，钱还没花光。
人生最悲惨的事是人没死，钱却花光了。

Just in case the underlying message is not clear, let me punch in further with the following crudely drawn graph:

I assume most of us come to this world naked and debt free. For the majority (or is it minority now?) without access to FMS (father-mother scholarship), it's normal to take up some loan to see themselves through tertiary education, thus it could be well into a third of our life (point C) that we manage to pay off our debt and start to pile on our net worth.

The interesting thing about the phrase above is whether most of us will actually reach point D. I do hope to move on before reaching point D, and leave behind some inheritance, either to my children or some charity. But looking at current advance in medical science, chances are I'll survive beyond point D and have the medical bills drag me into negative equity.

We only live once

Depending on the state of maturity, one will begin to differentiate between wants and needs. But looking at life's many uncertainties (natural calamities, sudden illness, accidents, terrorist attacks etc), why don't I pamper myself or my love one a little more, so long as the want is affordable? Anyway, we only live once right?

Yes and No

The key to the answer is no one knows when he or she will depart. (Oops, I'm going to rule out suicide here) One can indulge in anything all he wants, so long as he is 'fortunate' enough to leave this planet before point D, but so long as the probability is material that he might survive beyond point D, it always make sense to be a little more prudent.

Returns on Investment

I'm not discussing the investment in the specific sense (equity, bonds, commodities etc), but investment in general - i.e. what one gets as returns for something one gives up in the first place.

How long I will live, I don't know and I'll just let fate have that juridiction. I'll just focus on my life and my love ones. Having said that, I would think it will make more sense to ensure an effective and efficient use of my resources, be it time, money or energy (e.g. my attention or effort). In other words, if time, energy or money are my 'investment', the product, services, accomplishment etc i.e. 'returns' I get back must be worth the hours, dollars or effort put in. Returns on Investment must be maiximised.

Tangible and Intangible

It is always easier to focus on the tangible:

• Investment: Money
• Returns: Material Goods & Services such as Car, Condominiums, Grand Piano, Concerts

But overlooked the intangibles:

• Investment: Time, Energy, Opportunity Cost (Could have done something or bought something else)
  
• Returns: Sense of accomplishment, Satisfaction, Unintended opportunities
  

Thus while it might look crazy to some (especially myself) why there are people willing to take up huge loans, slog themselves like a hamster on a jogging wheel, just to buy the Continental Car, the Condominium with the great view or for interest sake, a Grand Piano of respectable standard etc, we must understand that the perceived returns on their investment is huge.

Margin of Safety

It will be another matter altogether if the perception is wrong in the first place. To borrow an equity investment concept, it is beneficial to be prudent and 'invest' only when the estimated, perceived 'returns' is much more than the 'investment'. Should the 'returns' fall short of expectation, chances are the 'returns' is still higher than the investment, i.e. hopefully, it will still be money well spent or worth the effort. Saving one the trouble of banging the wall.

Conclusion

Every Return is valued differently by different individual, as long as by ones' standard, the returns far outweighs an affordable investment one puts in, his or her resources is optimised for the life he or she desires.

(For all Tsit Wing minority shareholders's info) Meeting at Leng Kee Community Centre

Just doing my part to disseminate the following information to interested minority shareholders of Tsit Wing:

Date: 29July09
Time: 1800 - 1900 hrs

Place: Leng Kee Community Centre, Room 02-05
400 Lengkok Bahru, Spore 159049 (7 mins walk from the Redhill MRT station)

HDB Prices - Still so sticky???

In my earlier post on property prices in February this year, I shared my view on why I think there are still room for the prices to drop further. However, one waiting since then will be quite disappointed to note that the prices are still very sticky, especially HDB resale prices:

(src: http://www.hdb.gov.sg/fi10/fi10201p.nsf/WPDis/Buying%20A%20Resale%20FlatStatistics%20-%20Resale%20Price%20Index?OpenDocument)

High prices to stay?

I came across at least one article that doubts the prices can be sustained for long. But prices seems stuck on an up trend, although at a slower pace. To provide potential glimpse of the future prices, HDB had voiced their position:

Mr Mah continued: "If there is increased demand, yes, we will push out new flats. But we cannot be building new flats to cater to every last person who wants a new flat because if you do that, you are overbuilding and you don't want to do that. So some of the new demand will have to be met by resale flats."

(src: http://www.channelnewsasia.com/stories/singaporelocalnews/view/441255/1/.html)

Comparing DBSS and Resale Condominium in the suburbs

If high resale prices are indeed here to stay, what alternatives are there? Personally, if I can afford to wait, I'll prefer the more reasonably priced BTO in the suburbs. Anyway, I'm living in Sengkang but my parents live in Queenstown and my in-laws in Toa Payoh, though my wife and I do hope to live near them.

But for those who value location above everything else, they can either get the resale flat they wanted and pay the hefty cash overvaluation or the DBSS. The latter does not come cheap either. The recent launches, Park Central @ Ang Mo Kio, Natura Loft @ Bishan and The Peak @ Toa Payoh averaged above $500 per square feet.

I had a chat with my colleague and he brought my attention to 'competitively' priced resale condominiums in the suburbs. To my surprise, the price difference over HDB resale flats is really very small. Projects such as The Warren near Choa Chu Kang MRT, Astoria Park near Kembangan MRT and Compass Heights beside Sengkang MRT averaged about $600 to $700 per square feet.

As the DBSS prices get higher with each new launch, buyers should really think hard whether they are really getting value for their hard earned money. Staying in Bishan, Ang Mo Kio or Toa Payoh does not make much difference compared to Kembangan or Choa Chu Kang if the morning gridlock are there to stay. Taking the trains nearer town just means more crowded trains or not able to get on the first arriving train. But at least you got a pool to cool your heads in the condominium.

Conclusion

Other then the rich and wealthy, a property to normal working class couples should be just a decent roof over their heads, a place they retire to after long hours of hard work each day. Taking into account the hefty debt one must take on, it pays to be prudent in selecting ones' cave in this modern age when income security is always a challenge.