First Ship Lease Trust - Refinancing risks loom (DBSVickers)

HOLD S$0.35

Price Target : S$ 0.43

At a Glance

• 2Q11 DPU maintained at 0.95 UScts

• Proceeds of recent placement used to part-finance the DPU-accretive acquisition of two LR2 product tankers

• Distribution growth expected in FY12, but refinancing of ~US$230m debt looms in April 2012; maintain HOLD

Comment on Results

Spot market for product tanker improves to an extent. These tankers generated bareboat charter equivalent revenue of US$3.2m (inclusive of US$1.6m attributable to 1Q11) in 2Q11 vs. a US$1.1m loss in 1Q11, but the combined 1H11 bareboat revenue of US$2.1m fell significantly short of the US$7.6m bareboat charter revenue that these vessels would have earned in a 6-month period prior to redelivery last year. Cash earnings was thus, up 17% q-o-q to US$13.5m, and after loan prepayment of US$8.0m, net cash available for distribution amounted to US$5.5m, just about sufficient to pay out the 0.95 UScts DPU declared for the quarter. FSL Trust also recorded US$2.5m provisions in 2Q11, given that it lost its case against Daxin Petroleum in the PRC court.

Outlook and Recommendation

NAV dilutive, DPU accretive acquisitions. FSL Trust raised about US$15m via an equity placement last month and along with proceeds from previous round of placements, acquired two product tankers for US$46m each. These will be leased back to Denmark based TORM Tankers, and we estimate each vessel could add about US$6m charter revenue per year. As expected from a new equity issue at a discount to current market price, the placement will be dilutive at the NAV level, reducing end-FY11NAV by about 4.5%, in our estimate. However, given that the vessels will be 50% debtfunded, we expect DPU accretion of about 2%/ 9% in FY11/12.

Balance sheet still a worry. Post-acquisitions, net gearing could go up to 1.4x from current 1.2x and the Trust also has a pending refinancing target of close to US$230m debt by April 2012. Our TP of S$0.43 and HOLD rating remain unchanged, pending further clarity on asset values and refinancing plans.