First Ship Lease Trust - Smooth sail ahead with solid set of results

Previously plagued by multiple defaults on its long-term charters, First Ship Lease Trust (FSL) has staged a strong comeback since the change of the management in 2013. FSL is no longer in breach of the Value-to-Loan (VTL) loan covenant that resulted in a stoppage of dividend payments, and is set to ride the rising tanker market.

Potential resumption of dividends from strong cashflows
FSL could resume dividends after turning compliant with its loan covenant. From its TTM income available for distribution, FSL could pay ~1 S cent dividend per quarter (23.5% yield). Even if income from the containerships expiring in 2016 is not replaced, our model projects a min dividend potential of 0.6 S cents per quarter (13.6% yield) going forward. As the management prefers to wait to ensure that the distribution is reliable and sustainable if resumed, FSL has meanwhile embarked on share buybacks.

Booming tanker rates
FSL is the only SGX-listed shipping trust with a large exposure to tankers (16 out of a fleet of 23), benefiting from the surge in tanker rates. Demand for oil tankers increased with low oil prices, increasing imports by countries such as China and use of tankers as floating storage. Increased throughput of refined products and increasing voyage distances also bode well for the product tankers. As the oncoming supply does not appear excessive, we are bullish on the tanker segment.

Cheap even if we conservatively revalue the book to market
Even if we conservatively revalue FSL’s vessels to market and exclude the contracted revenue worth US$157m, which are above market rates, our derived net assets of US$123.4m (S$169.1m) are still above FSL’s market cap today.

Technical Analysis
Daily Chart
Extremely attractive with large discount to book, high profitability and strong cashflow generation
We value FSL at 26c (48% upside), equivalent to the revalued P/B of 1, while it is only trading at revalued P/B of 0.68 today. In the meantime, FSL’s peers are trading higher at P/B of 1.3, without revaluation of their book. We see great potential for FSL to rerate upwards. We will consider using a DCF valuation if FSL resumes regular dividends. Our DCF valuation, on conservative assumptions, puts the potential TP at 29c. The current product tanker charter rate has also roared ahead of our conservative assumptions. Profits are set to expand from decreasing depreciation and interest savings from aggressive repayment of debt. (Read Report)

Source : KGI Fraser Research

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