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Singapore Company Focus

First Ship Lease Trust


Bloomberg: FSLT SP EQUITY | Reuters: FSLT.SI

DBS Group Research . Equity 10 Jun 2010

FULLY VALUED S$0.395 STI : 2,745.80 More black clouds


(Downgrade from HOLD)
Price Target : 12-Month S$ 0.36 (Prev S$ 0.55)
• 2 vessels (chartered to defaulting lessee Groda)
Reason for Report : Vessels detained by port authorities detained in ports for non-payment of bunker fuel
Potential Catalyst: Clarity on terms of release of affected vessels and • Potential cash outflow to secure release and free
associated liabilities
ships of liabilities
Analyst
• FY10F DPU cut by another 19% to 3.9UScts
Suvro Sarkar +65 6398 7973
suvro@dbsvickers.com • Downgrade to Fully Valued, TP reduced to S$0.36
Defaulting lessee’s vessels detained. Over the past week,
FSLT announced the "arrest" of two of its vessels, Nika 1 and
Verona 1 (both operated by defaulting lessee, Groda Shipping)
Price Relative at ports in China and Japan, respectively. In maritime parlance,
S$

"arrest" implies the detaining of the ships by the nearest


R e la t iv e In d e x

219

maritime port authorities, usually on the request of a creditor. In


1 .7 0

1 .5 0

1 .3 0
169
this case, the vessels were "arrested" by Daxin Petroleum, a
1 .1 0
119
Singapore-based bunker supplier, for non-payment of bunker
0 .9 0 fuel supplied to Groda. The amount outstanding is estimated to
0 .7 0 69 be about US$4.1m. FSLT's immediate focus will be on securing
0 .5 0
the release of the ships, by paying a security payment or "bail"
as such, so that the vessels can resume normal operations.
0 .3 0 19
2007 2008 2009 2010

F ir s t S h ip L e a s e T r u s t (L H S ) R e la t iv e S T I IN D E X (R H S )

Cash flows under pressure. FSL management understands


that a total amount of US$4.8m will be required to be posted as
Forecasts and Valuation security to secure the release of the two ships, which is
somewhat higher than the underlying claim. Once the ships are
FY Dec (US$ m) 2008A 2009A 2010F 2011F released, litigation will proceed to settle claims. Thus, FSLT will
Turnover 87 99 92 92 have to fork out about US$5m in bailing out the vessels, and
EBITDA 79 92 85 84 incur further legal and professional fees. It could also face delays
Pre-tax Profit 5 8 (7) (8) in obtaining the original US$6m security deposits on the Groda
Net Profit 5 8 (8) (8) leases, as the vessel redelivery process gets complicated.
Net Pft (Pre Ex.) 5 8 (8) (8)
EPS (S cts) 1.4 2.2 (1.8) (1.9)
Moreover, the COA revenues from sub-charterer, Rosneft, could
EPS Pre Ex. (S cts) 1.4 2.2 (1.8) (1.9) be affected by this event and we believe Rosneft could even
EPS Gth Pre Ex (%) (24) 64 (181) 8 potentially walk out if there are lengthy delays in releasing the
Diluted EPS (S cts) 1.4 2.2 (1.8) (1.9) ships.
Net DPS (S cts) 16.3 9.9 5.5 6.8
BV Per Share (S cts) 106.8 90.0 82.7 74.0 Avoid for now. We reduce FY10F DPU by a further 19%, and
PE (X) 29.0 17.7 nm nm downgrade the stock to Fully Valued at a revised TP of S$0.36
PE Pre Ex. (X) 29.0 17.7 nm nm (15% target yield). S&P has also put FSLT’s “BB-“ corporate
P/Cash Flow (X) 2.3 2.1 3.0 3.1 rating under review for possible downgrade in light of recent
EV/EBITDA (X) 7.9 6.3 6.7 6.5 events.
Net Div Yield (%) 41.2 25.1 14.0 17.2
P/Book Value (X) 0.4 0.4 0.5 0.5
Net Debt/Equity (X) 1.3 1.1 1.2 1.2
ROAE (%) 1.2 2.2 (2.1) (2.5)
At A Glance
DPU Rev (%): (18.8) (9.4) Issued Capital (m shrs) 599
Consensus DPU (S cts): 8.0 7.9 Mkt. Cap (S$m/US$m) 236 / 167
Major Shareholders
ICB Industry : Financials FSL Holdings Pte Ltd (%) 26.4
ICB Sector: Equity Investment Instruments Bridge Partners (%) 6.0
Principal Business: Provides leasing services on a long term bareboat Free Float (%) 67.6
charter basis to the international shipping industry. Currently owns
Avg. Daily Vol.(‘000) 1,604
a fleet of 23 vesselsls.
Source of all data: Company, DBS Vickers, Bloomberg

www.dbsvickers.com
Refer to important disclosures at the end of this report
ed: JS / sa: JC
Company Focus

Two FSLT-owned vessels detained. Over the last week, First Too many uncertainties. S&P feels that FSLT's credit profile
Ship Lease has announced the "arrest" of two of its vessels, could come under pressure partly because of the uncertain
Nika 1 and Verona 1 at ports in China (Qingdao) and Japan, length of time of the vessel arrests and associated potential
(Shimotsu) respectively. In maritime parlance, "arrest" implies legal expenses. In addition, the arrest will make it difficult for
the detaining of the ships by the nearest maritime port the Russian government-controlled sub-charterer OJSC Oil
authorities, usually on the request of a creditor. In the case of Company, Rosneft, to use the arrested vessels for its long-
these ships, the vessels have been "arrested" by Daxin term contracts of affreightment (COAs) commitments.
Petroleum, a Singapore-based bunker supplier, for the non- Moreover, the situation is likely to make the re-delivery
payment of bunker fuel supplied to these vessels, which are process of the two vessels lengthier and more expensive,
currently on bareboat charter to affiliates of Groda Shipping. potentially complicating FSLT's access to the US$3m cash
The amount outstanding is estimated to be about US$4.1m. deposits originally made for each one of them.
What is still unknown is the legal intricacies, given that
jurisdictions of two separate countries are involved. More cash outflows probable. FSL management understands
that a total amount of US$4.8m will be required to be posted
These are the same ships on which the lessee, Groda as security to secure the release of the two ships, which is
Shipping defaulted about a month back. To recap, charterer somewhat higher than the underlying claim. Once the ships
Groda Shipping had redelivered these 2 product tankers in are released, litigation will proceed to settle claims. Thus,
May much before the scheduled date, owing to cash flow FSLT will not only have to fork out about US$5m in bailing
problems. Groda has not made lease payments for the ships out the vessels, but also potentially incur further legal and
in June, and FSLT management has been negotiating with professional fees. It could also face delays in obtaining the
sub-charterer Rosneft with regards to continuing the original US$6m security deposits on the Groda leases, as the
underlying COA contract without Groda in the middle. The vessel redelivery process gets complicated. Moreover, the
ships had not been taken over by FSLT yet, pending a due COA revenues from sub-charterer, Rosneft, could be affected
diligence of associated liabilities. Now, with this current by this event and we believe Rosneft could even potentially
situation, we believe FSLT's immediate focus will be on walk out if there are lengthy delays in releasing the ships.
securing the release of the ships, by paying a security
payment or "bail" as such, so that the vessel can resume Avoid for now. Taking the above factors into consideration,
normal operations for Rosneft. we reduce our DPU forecasts for FY10 and FY11 by a further
19% and 9% respectively, and downgrade the stock to Fully
S& P puts FSL on CreditWatch negative. Following the recent Valued at a revised TP of S$0.38 (higher target yield of 15%,
negative news flow, Standard & Poor's Ratings Services given the worsening credit profile)). Unless further clarity
recently placed its '”BB-'” long-term corporate credit rating emerges in this evolving situation, we believe it would be
on First Ship Lease Trust on CreditWatch with negative advisable to avoid the stock, though it appears potentially
implications. It also withdrew the 'B+' issue rating on FSL's cheap in terms of dividend yield.
proposed US$200 million senior unsecured notes, which the
company originally intended to launch in December 2009 but
withdrew due to unfavorable market conditions.

Scenario based valuations


Scenario Assumptions FY10 DPU (UScts) FY11 DPU (UScts) Valuation (S$)
Best case Situation resolved fast, lease on tankers transferred 4.4 4.8 S$0.41
directly to Rosneft
Base Case Situation drags on, Rosneft walks out of COA 3.9 4.8 S$0.36
arrangement
Bear Case Situation drags on, Rosneft walks out of COA 3.0 3.2 S$0.28
arrangement, other counterparties renegotiate

Note: All scenarios assume one-off litigation costs and US$5m bailout negating the US$6m security deposits on vessels, as well
as a temporary loss in revenue from the affected vessels
Source: DBS Vickers

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Company Focus

Income Statement (US$ m) Balance Sheet (US$ m)


FY Dec 2008A 2009A 2010F 2011F FY Dec 2008A 2009A 2010F 2011F
Turnover 87 99 92 92 Net Fixed Assets 906 845 782 719
Cost of Goods Sold (63) (68) (70) (70) Invts in Associates & JVs 0 0 0 0
Gross Profit 24 31 22 21 Other LT Assets 0 0 0 0
Other Opng (Exp)/Inc 0 0 0 0 Cash & ST Invts 27 57 53 53
Operating Profit 24 31 22 21 Inventory 0 0 0 0
Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 0 1 2 2
Associates & JV Inc 0 0 0 0 Other Current Assets 0 0 0 0
Net Interest (Exp)/Inc (19) (23) (29) (29) Total Assets 933 903 838 775
Exceptional Gain/(Loss) 0 0 0 0
Pre-tax Profit 5 8 (7) (8) ST Debt 0 32 32 32
Tax 0 0 0 0 Other Current Liab 45 20 17 17
Minority Interest 0 0 0 0 LT Debt 509 456 424 398
Preference Dividend 0 0 0 0 Other LT Liabilities 0 15 15 15
Net Profit 5 8 (8) (8) Shareholder’s Equity 378 381 350 313
Net Profit before Except. 5 8 (8) (8) Minority Interests 0 0 0 0
EBITDA 79 92 85 84 Total Cap. & Liab. 933 903 838 775

Sales Gth (%) 112.7 14.0 (6.8) (0.5) Non-Cash Wkg. Capital (45) (18) (15) (15)
EBITDA Gth (%) 107.7 17.0 (8.1) (0.7) Net Cash/(Debt) (483) (432) (403) (377)
Opg Profit Gth (%) 156.8 28.5 (29.6) (2.9)
Net Profit Gth (%) (23.5) 74.6 (190.1) 8.3
Effective Tax Rate (%) N/A N/A N/A N/A
Cash Flow Statement (US$ m) Rates & Ratio
FY Dec 2008A 2009A 2010F 2011F FY Dec 2008A 2009A 2010F 2011F
Pre-Tax Profit 5 8 (7) (8) Gross Margins (%) 27.8 31.4 23.7 23.2
Dep. & Amort. 55 61 63 63 Opg Profit Margin (%) 27.8 31.4 23.7 23.2
Tax Paid 0 0 0 0 Net Profit Margin (%) 5.6 8.5 (8.3) (9.0)
Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 1.2 2.2 (2.1) (2.5)
Chg in Wkg.Cap. 0 (1) (4) 0 ROA (%) 0.6 0.9 (0.9) (1.0)
Other Operating CF 21 24 0 0 ROCE (%) 3.2 3.5 2.6 2.7
Net Operating CF 81 92 52 55 Div Payout Ratio (%) 1,195.4 498.4 N/A N/A
Capital Exp.(net) (354) 0 0 0 Net Interest Cover (x) 1.2 1.4 0.7 0.7
Other Invts.(net) 0 0 0 0 Asset Turnover (x) 0.1 0.1 0.1 0.1
Invts in Assoc. & JV 0 0 0 0 Debtors Turn (avg days) 2.7 3.0 6.8 8.5
Div from Assoc & JV 0 0 0 0 Creditors Turn (avg days) 144.0 278.9 158.1 85.0
Other Investing CF 1 0 0 0 Inventory Turn (avg days) N/A N/A N/A N/A
Net Investing CF (353) 0 0 0 Current Ratio (x) 0.6 1.1 1.1 1.1
Div Paid (54) (45) (23) (29) Quick Ratio (x) 0.6 1.1 1.1 1.1
Chg in Gross Debt 350 (21) (32) (26) Net Debt/Equity (X) 1.3 1.1 1.2 1.2
Capital Issues 0 28 0 0 Net Debt/Equity ex MI (X) 1.3 1.1 1.2 1.2
Other Financing CF (15) (25) 0 0 Capex to Debt (%) 69.5 0.0 0.0 0.0
Net Financing CF 281 (62) (55) (55) Z-Score (X) 0.2 0.2 0.3 0.2
Net Cashflow 8 30 (4) 0 N. Cash/(Debt)PS (US cts.) (96.3) (72.1) (67.3) (63.0)
Opg CFPS (US cts.) 16.1 17.4 9.3 9.1
Free CFPS (US cts.) (54.5) 17.2 8.6 9.1
Quarterly / Interim Income Statement (US$ m) P/BV (x)
FY Dec 2Q2009 3Q2009 4Q2009 1Q2010 (x)
Turnover 25 25 24 24
1.4
Cost of Goods Sold (17) (17) (17) (17)
Gross Profit 8 8 8 7
Other Oper. (Exp)/Inc 0 0 0 0 1.2
Operating Profit 8 8 8 7
Other Non Opg (Exp)/Inc 0 0 0 0 1.0
Associates & JV Inc 0 0 0 0
Net Interest (Exp)/Inc (6) (5) (6) (7)
0.8
Exceptional Gain/(Loss) 0 0 0 0
Pre-tax Profit 2 3 2 1
Tax 0 0 0 0 0.6
Minority Interest 0 0 0 0
Net Profit 2 3 2 1 0.4
Net profit bef Except. 2 3 2 1
EBITDA 23 23 23 23 0.2
Sales Gth (%) 0.1 (0.9) (0.6) (0.2) May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10
EBITDA Gth (%) 0.3 (1.1) (0.1) (0.4)
Opg Profit Gth (%) 0.8 (3.1) (0.2) (3.4)
Net Profit Gth (%) 52.9 16.6 (34.1) (62.0)
Gross Margins (%) 31.8 31.0 31.2 30.2
Opg Profit Margins (%) 31.8 31.0 31.2 30.2
Net Profit Margins (%) 9.4 11.1 7.4 2.8

Source: Company, DBS Vickers

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Company Focus

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Company Focus

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