Pacific Shipping Trust (PST)

[PassiveReturns]

Financial result released for Q3FY2010 : DPU is 1.7% higher than Q3FY2009, and about 4.9% higher than Q2FY2010

[tonylim]

Subject: DBS Vickers (Spore): Pacific Shipping Trust: BUY
US$0.34, Growth, diversification plans on track, Price

Target : US$ 0.39 (Prev. US$0.37)

Pacific Shipping Trust, BUY US$0.34, Bloomberg: PST SP Growth, diversification plans on track

Price Target : US$ 0.39 (Prev. US$0.37)
By: Suvro Sarkar +65 6398 7973 suvro@dbsvickers.com

At a Glance
* 3Q10 DPU of 0.83UScts in line with our expectations

* Existing cash flows look stable, diversification and growth plans remainon track with recent acquisition of 2 Multi Purpose Carriers for delivery in late 2012

* Trading at about 11% FY11 yield, maintain our BUY call at higher TP of US$0.39 (9% target yield on FY11 DPU)

Comment on Results
DPU of 0.83UScts was declared for the quarter, which is 5% higher than 2Q10 DPU but similar to the payout in 3Q09, when PST first started conserving 30% of distributable cash. 3Q10 revenue of US$15.6m held steady, and net profit was up 9% q-o-q to US$7.2m. After regular loan amortisation payment of US$4.3m, net cash generated for 3Q10 amounted to US$7.0m, of which approximately US$4.9m will be distributed to unitholders and the remaining US$2.1m retained for future working capital purposes.

Outlook & Recommendation
Following its earlier plans to acquire two new capesized bulk carriers for delivery in Sep 2011, PST has announced further growth plans and
diversification into MPP vessels, with an order for 2 vessels worth US$60m for delivery in Sep/Dec 2012. The vessels will be chartered out for 10 years to COSCO Xiamen, a subsidiary of the COSCO Group. Pre-delivery payments for these ships will be supported by advances from sponsor PIL, and hence financing requirements will be back-loaded. To recap, the payment schedule for the bulk carriers are back-loaded as well, with 85% to be paid on delivery. Thus, while there is no immediate DPU accretion, there are no immediate funding needs as well.

Management is content to wait for better financing deals as they believe
the market for ship financing is improving (it is possible to obtain more
than 60% Loan-to-Value currently). Given the current cash buffer, we thus push back our equity fund raising assumptions to 2012, as we believe at least the bulk carrier deal can potentially be financed without raising additional equity. Maintain BUY, TP revised up to US$0.39, as we roll over valuations to FY11.

[PassiveReturns]

Hi tonylim, good information and thank you.

[Nick]

Hello Everyone,

I found a few interesting articles in this blog about PST. It contains a recent research report from SIAS and an article from The Edge released last month.

Link: http://kfc1973-stock.blogspot.com/search/label/PST

I guess PST will have to under-take a small equity fund raising exercise to fund its latest set of acquisitions.

Vessel Cost: US$183.2 million

Possible Financing:
Debt: US$110 million (assuming 60% LTV loan)
Retained Earnings*: US$32 million
New Equity: US$40 million (approx 1/5 of current market cap)

*Retained Earnings is calculated as such -

Current Cash: US$9 million
Cash Utilized for Vessel Down-payment in 3Q 10: US$14 million
Cash Conserved per quarter: US$2 million
No of quarters till 2H 2012: 7

Retained Earnings: 14 + (2 X 7) + 4 = US$32 mil

These numbers are guess-work since PST has yet to reveal any loan financing plans or equity fund raising measure. Moreover, there is no assurance that they can continue to generate similar level of cash-flow for the next 2 years. But I guess it will be some-where along this line unless PST continues to acquire more vessels.

It will be interesting to see whether PST continues to retain 30% of its net profit for growth. If it does, the rate of growth of retained earnings will increase due to the compounding effect. Honestly, I rather invest in a Trust with growing NAV as opposed to one which keeps vanishing !

Cheers,
Nick

(Vested)
Disclaimer: Not a call to buy or sell. Shipping Trust are high-risk investments !

[Nick]

CSAV released its 3Q results in the previous week and reported its second consecutive quarter of positive earnings. It earned US$179.8 million in 3Q 2010. CSAV currently leases 2 X 4,250 TEU vessels from PST on 5 year T/C. It did seek a fleet-wide rate cuts last year from shipowners (PST did not participate). Hence, it is good to see it returning back to profitability after its massive restructuring exercise in 2009.

PST has little fleet charterer diversification so the financial health of its two charterers play a key role in determining the Trust's future !!! Fortunately, the recent 4 acquisitions will further diversify the Trust charter-base to spread out its counter-party risk.

Besides the usual counter-party risk, PST recent US$183.2 million acquisition entails a new form of risk - financing (or rather lack of) risk. It has yet to secure loan financing or equity placements. Granted, it may be waiting for better financing options in light of the decreasing interest rates and recently rising unit prices. But till then, this risk exist. So buyers beware

(Vested)

[cfa]

CSAV released its 3Q results in the previous week and reported its second consecutive quarter of positive earnings. It earned US$179.8 million in 3Q 2010. CSAV currently leases 2 X 4,250 TEU vessels from PST on 5 year T/C. It did seek a fleet-wide rate cuts last year from shipowners (PST did not participate). Hence, it is good to see it returning back to profitability after its massive restructuring exercise in 2009.

PST has little fleet charterer diversification so the financial health of its two charterers play a key role in determining the Trust's future !!! Fortunately, the recent 4 acquisitions will further diversify the Trust charter-base to spread out its counter-party risk.

Besides the usual counter-party risk, PST recent US$183.2 million acquisition entails a new form of risk - financing (or rather lack of) risk. It has yet to secure loan financing or equity placements. Granted, it may be waiting for better financing options in light of the decreasing interest rates and recently rising unit prices. But till then, this risk exist. So buyers beware

(Vested)

The Teos of the PIL are very conservative family, they don't simply take uncalculated risks. They always enjoy good supports from their bankers .

[Nick]

PST announced 2 set of good news today which will please unit-holders.

http://info.sgx.com/webcoranncatth.nsf/V...6003B5576/$file/PST_PR_26Nov10.pdf?openelement [Press release]

http://info.sgx.com/webcoranncatth.nsf/V...6003B2BD8/$file/PST_Ann_Financing_26Nov10.pdf?openelement [Financing Release]

Secured financing for the US$183.2 million acquisition

PST acquired two 180,000 DWT vessels in 2Q 2010 and leased it to Shagang (largest private steel player in China) on a 10 year charter. The vessels will be delivered in 4Q 2011 and it cost US$123.2 million in total. PST acquired a further two MPP vessels in 3Q 2010 and leased it to Cosco on a 10 year charter. The vessels will be delivered in 2H 2012 and it cost a total of US$60 million. The vessels have average revenue to asset yield of 16-18% and assuming a net margin of 45%, the ROA will be around 8%. Yesterday, PST announced that it has managed to secure a US$150 million bank loan from Bangkok Bank Public Company Limited, DBS Bank Ltd and Malayan Banking Berhad for the above mentioned acquisitions. This translates to an 80% LTV (loan to valuation) which exceeded my expectation of 60% LTV. This suggests that banks are still willing to lend to financially stable ship-owners to purchase vessel at current market price. There is no mention of the loan terms ie maturity dates, interest margins etc. At the moment, I am assuming that it will be structured in the same way as its previous loans , long term amortizing loans with no LTV covenants.

The even bigger surprise came from the following statement ,

"The proceeds from the above bank financing, together with the funds made available from PST's existing cash retention programme, should make it unnecessary for PST to raise new equity for funding the Acquisitions."

This means that there will be no rights issue or private placements to fund the above mentioned acquisitions. Instead, PST will turn to its own cash-flow to fund the equity portion of the 4 vessels of US$33.2 million. PST has already paid US$14 million as down payment to the shipyard building the 2 Capesize vessels. Since PST retains US$2 million per quarter on average, I am certain that it should be able to cough out the remaining US$19 million over the next 2 years.

"Consequently, the existing unitholders should benefit from the Transaction as and when the charter earnings come onstream. This is a validation of PST's previous decision to implement its cash retention program with a view to ultimately benefiting its unitholders."

PST started aggressively conserving 30% of its net income since 3Q 2009 and since then, it has retained around US$10 million for fleet expansion. There were doubts initially whether this cash retainment policy could lead to anything substantially. Personally, I felt it was just to prepare unit-holders for the impending rate cuts from CSAV. However, with the latest financing, the Trust was able to substantially expand its fleet without raising a single cent of new equity hence growing unit-holder's value. I would expect PST to retain this policy indefinitely. Personally, I do not expect major growth from a business trust , just as long as the dividends are safe and the NAV is stable.

Acquisition of 5 X 57,000 DWT Supramax Vessels

http://info.sgx.com/webcoranncatth.nsf/V...6003AF582/$file/PST_Ann_Glovis_26Nov10.pdf?openelement [SGX Announcement]

PST confirmed the acquisition of the above 5 vessels for US$150 million and it will be delivered between Oct 2012 and Apr 2013. The 5 vessels will be chartered to Glovis (an affiliate of the Hyundai Kia Group) on 8 to 10 year charters to generate cash-flow of approximately US$250 million. Glovis is rated BBB (Stable) by Standard & Poors and Baa2 (Stable) by Moody's in 4 November 2010 and 21 September 2010 respectively. The estimated revenue to asset yield is 18% which is in line with the previous 2 acquisitions.

Glovis has been expanding its vessel base this year. Another shipping trust - Ship Finance Limited - has concluded a similar deal with Glovis in August 2010.

Ship Finance 3Q 2010 Results -

[http://hugin.info/134876/R/1464855/403265.pdf]

Ship Finance has agreed to acquire five 57,000 dwt Supramax dry bulk carriers built in China. The total acquisition price is approximately $161 million. The vessels include one 2009-built vessel which was delivered to the Company in October 2010 and four newbuildings with estimated delivery to the Company from the fourth quarter 2010 to the third quarter 2011. Concurrently with the bulker acquisitions, the Company has secured long-term time charters for the vessels to Glovis Co. Ltd. ("Glovis"), an investment-grade Korean logistics company with a market capitalization of more than $5 billion. The average charter period is more than nine years and the average net charter rate is approximately $16,800 per day per vessel. The charters increase Ship Finance's fixed-rate charter backlog with approximately $279 million and there are no purchase options attached.

In November 2010, Ship Finance secured bank financing for two of the five recently announced Supramax bulk carrier acquisitions. The new loan will be approximately $54 million, or 80% of the purchase price of the vessels and will have a tenor of eight years.

It is interesting to note that PST acquisition price was slightly below that of Ship Finance. Moreover, they had managed to secure loans for 2 of the vessels at 80% LTV which is similar to PST latest financing deal. Being conservative, I will assume PST secures a loan at 70% LTV, it will hence need US$45 million of new equity to fund the acquisition. I highly expect equity fund raising to take place for this acquisition. Based on its last traded unit price, PST market capitalization stands at US$212 million.

Interesting Thoughts

Higher Yielding Assets

Based on the current fleet of 12 vessels, the revenue to acquisition asset price is around 13%. However, the recent 3 sets of acquisitions have revenue to asset yield of 16-18%. The higher yields should translate to stronger margins. Moreover, this isn't a case of buy high charter high since vessels are trading at "normalized levels".

More Cash Retained ?

Once all 21 vessels are on-stream, the amount of cash retained on a quarterly basis should increase substantially. However, with the expected equity fund raising, the growth in book value should remain pretty small (4-6% annually).

Shipping Sweet Spot

Shipping is a cyclical industry and as a shipowner, the most profitable decisions are made at the industry's bottoms. The shipping sector was hit hard by a huge recession which crippled many companies due to their high leverage and poor freight rates. As a result, few companies are willing to acquire new ships since they lack the strength to do so. The only companies which are actively buying ships are those large conglomerates with a huge financial warchest. Such companies are ideal counter-parties in any transactions. This is unlike 2006-2008 where all kinds of companies were buying and leasing ships from shipping trust. Furthermore, throw in the fact that most alternative shipping financiers (ie shipping trust) are too broke to expand, stronger shipping trust can expand without much competition. And let's not forget the dwindling order book of ship builders due to the vessel over-capacity , they are more likely willing to accept lower margin contracts than as before. Hence in summary, a strong shipping trust can benefit from this sweet spot , few competitors (higher margins), blue chips quietly expanding (better counter-parties) and shipbuilders willing to construct vessels at low cost (higher asset yield).

Key Risk

Counter-party risk is a big issue in PST since it lacks diversification and its loan structure requires it to repay loans on a monthly basis.

While one major financing risk has been removed, another has cropped up. A double-dip recession will hamper financing and may lead to a value-destroying fund raising exercise and lead to yield-negative acquisition.

PST has no track record in dry bulk vessels or MPP vessels.

PST dividend and unit price is in US$ which has depreciated against the SG$ massively over the past few months.

A lot of things can happen from today till 2013 haha !

Disclaimer: Vested...Shipping Trust is a high risk investment. Not a call to buy or sell.

Please feel free to share your views

[tonylim]

PST announced 2 set of good news today which will please unit-holders.

http://info.sgx.com/webcoranncatth.nsf/V...6003B5576/$file/PST_PR_26Nov10.pdf?openelement [Press release]

http://info.sgx.com/webcoranncatth.nsf/V...6003B2BD8/$file/PST_Ann_Financing_26Nov10.pdf?openelement [Financing Release]

Secured financing for the US$183.2 million acquisition

PST acquired 2 180,000 DWT vessels in 2Q 2010 and leased it to Shagang (largest private steel player in China) on a 10 year charter. The vessels will be delivered in 4Q 2011 and it cost US$123.2 million in total. PST acquired a further two MPP vessels in 3Q 2010 and leased it to Cosco on a 10 year charter. The vessels will be delivered in 2H 2012 and it cost a total of US$60 million. The vessels have average revenue to asset yield of 16-18% and assuming a net margin of 45%, the ROA will be around 8%. Yesterday, PST announced that it has managed to secure a US$150 million bank loan from Bangkok Bank Public Company Limited, DBS Bank Ltd and Malayan Banking Berhad for the above mentioned acquisitions. This translates to an 80% LTV (loan to valuation) which exceeded my expectation of 60% LTV. This suggests that banks are still willing to lend to financially stable ship-owners to purchase vessel at current market price. There is no mention of the loan terms ie maturity dates, interest margins etc. At the moment, I am assuming that it will be structured in the same way as its previous loans , long term amortizing loans with no LTV covenants.

The even bigger surprise came from the following statement :

"The proceeds from the above bank financing, together with the funds made available from PST's existing cash retention programme, should make it unnecessary for PST to raise new equity for funding the Acquisitions."

This means that there will be no rights issue or private placements to fund the above mentioned acquisitions. Instead, PST will turn to its own cash-flow to fund the equity portion of the 4 vessels of US$33.2 million. PST has already paid US$14 million as down payment to the shipyard building the 2 Capesize vessels. Since PST retains US$2 million per quarter on average, I am certain that it should be able to cough out the remaining US$19 million over the next 2 years.

"Consequently, the existing unitholders should benefit from the Transaction as and when the charter earnings come onstream. This is a validation of PST's previous decision to implement its cash retention program with a view to ultimately benefiting its unitholders."

PST started aggressively conserving 30% of its net income since 3Q 2009 and since then, it has retained around US$10 million for fleet expansion. There were doubts initially whether this cash retainment policy could lead to anything substantially. Personally, I felt it was just to prepare unit-holders for the impending rate cuts from CSAV. However, with the latest financing, the Trust was able to substantially expand its fleet without raising a single cent of new equity hence growing unit-holder's value. I would expect PST to retain this policy indefinitely. Personally, I do not expect major growth from a business trust , just as long as the dividends are safe and the NAV is stable.

Acquisition of 5 X 57,000 DWT Supramax Vessels

http://info.sgx.com/webcoranncatth.nsf/V...6003AF582/$file/PST_Ann_Glovis_26Nov10.pdf?openelement [SGX Announcement]

PST confirmed the acquisition of the above 5 vessels for US$150 million and it will be delivered between Oct 2012 and Apr 2013. The 5 vessels will be chartered to Glovis (an affiliate of the Hyundai Kia Group) on 8 to 10 year charters to generate cash-flow of approximately US$250 million. Glovis is rated BBB (Stable) by Standard & Poors and Baa2 (Stable) by Moody's in 4 November 2010 and 21 September 2010 respectively. The estimated revenue to asset yield is 18% which is in line with the previous 2 acquisitions.

Glovis has been expanding its vessel base this year. Another shipping trust - Ship Finance Limited - has concluded a similar deal with Glovis in August 2010.

Ship Finance 3Q 2010 Results -

[http://hugin.info/134876/R/1464855/403265.pdf]

Ship Finance has agreed to acquire five 57,000 dwt Supramax dry bulk carriers built in China. The total acquisition price is approximately $161 million. The vessels include one 2009-built vessel which was delivered to the Company in October 2010 and four newbuildings with estimated delivery to the Company from the fourth quarter 2010 to the third quarter 2011. Concurrently with the bulker acquisitions, the Company has secured long-term time charters for the vessels to Glovis Co. Ltd. ("Glovis"), an investment-grade Korean logistics company with a market capitalization of more than $5 billion. The average charter period is more than nine years and the average net charter rate is approximately $16,800 per day per vessel. The charters increase Ship Finance's fixed-rate charter backlog with approximately $279 million and there are no purchase options attached.

In November 2010, Ship Finance secured bank financing for two of the five recently announced Supramax bulk carrier acquisitions. The new loan will be approximately $54 million, or 80% of the purchase price of the vessels and will have a tenor of eight years.

It is interesting to note that PST acquisition price was slightly below that of Ship Finance. Moreover, they had managed to secure loans for 2 of the vessels at 80% LTV which is similar to PST latest financing deal. Being conservative, I will assume PST secures a loan at 70% LTV, it will hence need US$45 million of new equity to fund the acquisition. I highly expect equity fund raising to take place for this acquisition. Based on its last traded unit price, PST market capitalization stands at US$212 million.

Interesting Thoughts

Higher Yielding Assets

Based on the current fleet of 12 vessels, the revenue to acquisition asset price is around 13%. However, the recent 3 sets of acquisitions have revenue to asset yield of 16-18%. The higher yields should translate to stronger margins. Moreover, this isn't a case of buy high charter high since vessels are trading at "normalized levels".

More Cash Retained ?

Once all 21 vessels are on-stream, the amount of cash retained on a quarterly basis should increase substantially. However, with the expected equity fund raising, the growth in book value should remain pretty small (4-6% annually).

Shipping Sweet Spot

Shipping is a cyclical industry and as a shipowner, the most profitable decisions are made at the industry's bottoms. The shipping sector was hit hard by a huge recession which crippled many companies due to their high leverage and poor freight rates. As a result, few companies are willing to acquire new ships since they lack the strength to do so. The only companies which are actively buying ships are those large conglomerates with a huge financial warchest. Such companies are ideal counter-parties in any transactions. This is unlike 2006-2008 where all kinds of companies were buying and leasing ships from shipping trust. Furthermore, throw in the fact that most alternative shipping financiers (ie shipping trust) are too broke to expand, stronger shipping trust can expand without much competition. And let's not forget the dwindling order book of ship builders due to the vessel over-capacity , they are more likely willing to accept lower margin contracts than as before. Hence in summary, a strong shipping trust can benefit from this sweet spot , few competitors (higher margins), blue chips quietly expanding (better counter-parties) and shipbuilders willing to construct vessels at low cost (higher asset yield).

Key Risk

Counter-party risk is a big issue in PST since it lacks diversification and its loan structure requires it to repay loans on a monthly basis.

While one major financing risk has been removed, another has cropped up. A double-dip recession will hamper financing and may lead to a value-destroying fund raising exercise and lead to yield-negative acquisition.

PST has no track record in dry bulk vessels or MPP vessels.

PST dividend and unit price is in US$ which has depreciated against the SG$ massively over the past few months.

A lot of things can happen from today till 2013 haha !

Disclaimer: Vested...Shipping Trust is a high risk investment. Not a call to buy or sell.

Please feel free to share your views

Nick,
Many thanks for your detailed research. Really well done.
(Vested also )

[piggo]

Noticed Mercator (they focus on dry bulk shippers) have also been acquiring new vessels despite the relatively sad charter rates... which makes me wonder about their optimism about the BDI improving in a few years down the road.

[Nick]

I dont think there is a major difference in asset yield as compared to 2007. The drop in freight rates is offset-ted by a sharp drop in asset valuation as well. A $50 million ship generating freight revenue of US$8 million a year is no different from a $25 million ship generating $4 million revenue a year. The problem only starts when you have a US$50 million ship generating US$4 million a year. Good examples would be shipping companies who purchased vessels in 2006-2008 and failed to lock in to any COAs or CVCs then which implies that they are trading in the very low spot market now. FSLT's 2 product tankers are in the same boat as well.

At the moment, Mercator (as well as Courage Marine and Golden Ocean) has been busy acquiring ships since the asset yield remains relatively attractive. The BDI may be at historic lows but so too is newbuilding prices. Moreover, there is the added bonus of the possibility of capital appreciation should the BDI turnaround. In summary, there is no harm in buying high-chartering high or buying low-chartering low...problem starts when you buy high and charter low !

However, again such companies are taking a risk..who is to say that freight rates will not drop by another 40% ? Shipping liners are pretty risky and cyclical businesses so timing is crucial. While, revenue to asset yield may not be as high as 2008 levels, with freight rates at lower prices I guess the possibility of counter-party defaulting is lower.

(Not vested in any ship operators)