First Ship Lease Trust - Progress towards refinancing borrowings (DBSVickers)

HOLD S$0.31

Price Target : S$ 0.34 (Prev S$ 0.43)

At a Glance

• 3Q11 DPU maintained at 0.95UScts, though distributable cash flow improves on sequential basis

• Progress made towards refinancing existing borrowings

• Yields look attractive but maintain HOLD pending the outcome of refinancing exercise and efforts to deploy 2 product tankers from spot market to long-term leases

Comment on Results

Spot market product tanker performance disappoints but cash flow shores up by new TORM leases. As a result of full-quarter lease revenue from the two newly acquired vessels leased to TORM, revenue was up 22% to US$28.6m. On a q-o-q basis though, revenue was flat as the product tankers on spot market performed weaker. Cash earnings were boosted 16% y-o-y and 11% q-o-q to US$15.6m due to the accretive TORM deal and lower interest expenses following the expiry of covenant waiver period in 2Q11. After loan repayments of US$7.2m, net income available for distribution was up 38% y-o-y to US$8.4m, but management decided to maintain DPU of 0.95UScts for the quarter.

Recommendation

Loan refinancing is the first priority. With one tranche of close to US$240m maturing in April 2012, and another tranche of US$243m maturing in March 2014, management has decided to refinance the entire outstanding amount with a partially amortising 6-year loan. Firm commitments have been secured from a group of 6 lenders (both existing and new) for 90% of the amount and management is hopeful of securing the rest by the end of FY11. We estimate spreads for the new loans will be significantly higher than existing 125-145bps, pushing up interest costs. And with loan amortisation payments to be made every quarter, DPU growth may be limited. Pending finalization of and details of the refinancing exercise and a long-term lease solution to end the earnings volatility from the 2 product tankers trading on the spot market, we retain our HOLD call on the stock. Our TP is revised down to S$0.34 (14% target yield) as we account for the higher risk environment. Upside may be capped by recent round of equity placement at S$0.35.