Pacific Shipping Trust-DBS

22/01/10
Pacific Shipping Trust
HOLD US$0.28
(Upgrade from Fully Valued)
Price Target : 12-Month US$ 0.30 (Prev US$ 0.22)

Steadily improving outlook
• Gross revenue =US$15.6m in 4Q09, (flat QoQ, +7.6% YoY)
• Cash earnings -US$11.3m (+1.2% QoQ, 10% YoY).
• Distributable income of US$4.9m (up 1% q-o-q)
• 4Q09 DPU = of 0.83UScts

• 70% DPU payout ratio in line with strategy to conserve cash for acquisitions
• Key customer CSAV concludes 2nd round of equity fund raising, credit ratings show improvement
• Raising FY10 DPU estimates by 15%, upgrade to HOLD; TP raised to US$0.30

Outlook on the CSAV front looks better. CSAV recently concluded a second round of equity raising worth US$290m, paving the way for the 3rd round of capital injection (US$360m) from German ship owners – by way of charter rate cuts – which was conditional on the success of the first two rounds of fund-raising. Credit rating agency S&P, while reaffirming its "B-" credit rating for CSAV recently, removed CSAV from the CreditWatch list and noted that the company's financial flexibility had improved. S&P also maintained its "BB-" rating for PIL in its last update.

Upgrade to HOLD. Currently, our FY10 numbers assume a 30% cut in charter rates for the CSAV vessels, but we believe the probability of such a cut may be lower now, given the improving industry fundamentals in general and CSAV’s balance sheet in particular, and the fact that PST’s 2 ships could be well below CSAV’s radar for renegotiations. Thus, we now ascribe a 50% probability to the event of a rate cut, and raise our FY10 DPU estimate to 3.0UScts from 2.6Uscts earlier. Our TP is likewise revised to US$0.30, pegged to 10% target yield, based on counterparty risk profile. Upgrade to HOLD. A favourable resolution to the CSAV saga could be a key re-rating catalyst, as would be DPU accretive acquisitions.


Improving cash position at CSAV
A sharp decline in revenues and profitability in the wake of the financial crisis, coupled with a sizeable orderbook, resulted in a deep balance sheet hole for CSAV since the later part of 2008. In mid-2009, they announced a US$710m equity fund raising programme to avert the crisis comprising i) a first round of capital increase of US$130m; ii) a second round of equity issuance worth US$220m, and iii) US$360m capital contribution by ship owners through the capitalization of delayed payments and charter rate cuts. However, the 3rd part was only to be triggered once the first two capital injections were successfully accomplished.

Now that the 2nd round of equity fund raising has been completed in December 2009, raising US$290m instead of the proposed US$220m, the 3rd round should automatically go through, subject to formalization. Ship owners had agreed to contribute up to S$360m out of the proposed US$400m, and we believe only charterers, Seaspan and Pacific Shipping Trust have chosen not to participate in the bailout. The Company has also restructured its shipbuilding plan, by delaying deliveries and modifying vessel sizes, and has been able to secure debt financing for the newbuilds.

S&P removes CSAV from negative watch
In September 2009, S&P re-affirmed its “B-“ credit rating on CSAV, but removed it from the CreditWatch list, and noted that CSAV’s financial flexibility had improved, following successful negotiations with shipyards and lessors along with the US$145m equity infusion. The rating was maintained in a December 2009 update. This, we believe, is further evidence of the improving counterparty risk profile of CSAV. To confirm, management updated that CSAV has been paying its charter hires in full and on time until now, and has not approached PST for any talks of late.

Outlook for parent PIL also seems stable
In Aug 2009, the credit rating of PST’s sponsor and main customer, PIL, was also removed from S&P’s CreditWatch list, and was maintained at “BB-“ in September. The fact that PIL operates in niche intra-Asian markets, rather than the main lane Asia-Europe or Transpacific routes, made it less susceptible to the sharp slide in freight rates during the recent downturn. Thus, the impact to its profitability has not been as severe as some of the other main lane operators. From our checks, we understand that PIL has also been able to successfully secure financing for its outstanding orderbooks, and thus balance sheet stress is manageable.

Pacific Shipping Trust-OCBC

22/01/10
Pacific Shipping Trust: No surprises at 4Q results.

Gross revenue =US$15.6m in 4Q09, (flat QoQ, +7.6% YoY)
Cash earnings -US$11.3m (+1.2% QoQ, 10% YoY).
4Q distribution = 0.827 US cents

Meanwhile, rate cut discussions with charterer CSAV are still ongoing but PST said it was “encouraged” by recent financial developments at the liner. Even though there has been some positive news in the container markets as of late on freight rates – we continue to remain UNDERWEIGHT shipping trusts. Maintain HOLD and US$0.23 fair value estimate on PST.

Reduced payout continues. Distributed income rose 1.1% QoQ but fell 11.1% YoY to US$4.9m. This is as PST has lowered its distribution payout level from 3Q09 onwards. The current payout is equivalent to 69.6% of income available for distribution (4Q08: 87.4%) or 43% of cash earnings (4Q08: 53%). PST has paid off US$17.1m in loans this year, and holds another US$17.9m in cash as of 31 Dec. The trust is geared at 0.9x debt-to-equity at year end. The manager re-iterated plans to use the retained cash towards acquisitions that diversify the trust out of the sickly container sector.

Rate cut discussions with charterer are still ongoing. PST has two vessels leased to CSAV. The trust said it was “encouraged” by recent events at CSAV: the liner recently completed its second equity fund-raising and it obtained shareholders’ approval for its third equity offering. While CSAV’s situation is stabilizing, it remains to be seen whether that will make the operator any more yielding when it comes to discussions with PST. Our view is that renegotiations are a broader industry issue and rate cuts will be hard to avoid.

No major changes to our views. There has been some positive news in the container markets as of late with liners attempting to increase rates on key routes. It remains to be seen if and when the industry can climb back to profitability with order books and US consumption still major overhangs. Nevertheless, the default cycle is expected to only peak roughly a year from when shipping markets hit bottom and we are still UNDERWEIGHT the shipping trust sector. 2010 could be an interesting year for the trusts as we believe they could get caught up in a broader de-rating of the alternative ship financing industry. Our US$0.23 fair value estimate for PST – kept unchanged – is pegged at a 30% discount to our discounted FCFE valuation of the trust (13% discount rate). Maintain HOLD