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Sunday, 26 July 2009

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.


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.



Anonymous Anonymous said...

Value to loan covenants make use of market valuation of the vessels in the calculations. The book values of FSLT's vessels are not likely to be indicative of the market values as their vessels were bought before values started to fall. With most vessel prices down at least 15-20% since FSLT's last valuation in Oct 08 (~896m?), it would not be surprising if they technically breach their covenant in Nov when they do a new fleet valuation.

29 July 2009 at 19:25  
Blogger Market Uncle said...

If you look at BDI for the past year:

you'll notice that it had crashed quite pathetically during oct 08. Thus the last valuation occurs when valuation probably took a hit. But I do agree the coming one will be at an even more depressed level.

The management probably anticipated this, thus they began balance sheet restructuring measures like DRS and voluntary loan repayment. Hopefully, they'll be able re-negotiate the loan terms to waive or remove the covenants altogether.

29 July 2009 at 20:14  

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