FSL TRUST: Strongly Cash Generative Business

Lotustpsll contributed this article to NextInsight

FSL Osaka is a product tanker on the FSL Trust fleet of 22 vessels.
Photo: Company

Against the headwinds of the shipping market slump, the unit price of First Ship Lease Trust (FSL Trust) has gone from a low of 7.1 cents on 7 March 2014 to about 18 cents currently, thanks to its business turnaround.

Alan Hatton
“The Trust’s diverse and strong mix of secure long-term charters and managed market exposure in better performing sectors leaves the Trust well positioned despite the challenging shipping market.”

– Alan Hatton
CEO
(Photo: Company)

This is a stock that I am vested in. Despite the vagaries of the shipping market and the current weak industry conditions, I like FSL Trust for the following reasons:

Strong new management team that has engineered the turnaround of its operations since FY2013.
Over the past 4 years, long-term borrowings have been significantly reduced from about US$430 million in FY2010 and FY2011 to about US$250 million as at 30 June 2016, funded from operating cash flow and sale of vessels.
Free cash flow yield was at 16.8% for FY2015 (taking into account of loan repayment and interest servicing).
Net surplus from operating cash flow yield was at a staggering 53% (based on a unit price of 17.7 cents).
Since FY2013, FSL Trust has generated on average about US$70 million of surplus from its operating cash flow annually.
Stable counter-party risk

FSL Trust had a difficult period from FY2010 to FY2013, with four consecutive years of losses due to lessee defaults and impairments. Things turned around after its current CEO, Alan Hatton, was appointed on 27 August 2013. That was at the depths of its woes when FY2013 incurred a net loss of US$65.2 million.

Mr Hatton and his new management team secured extensions on the repayment timeframe for the Trust’s loans and disposed of vessels to free up cash. FSL Trust turned around in FY2014 with a net profit of US$4.1 million.

First Ship Lease Trust
Stock Price	18c
Market Cap	S$114.7 million
52-week High Low	12.8c to 18.5c
Gearing	46%
PE Ratio	7.9x
Source: Bloomberg (data as of 5 Sep 2016)

By January 2015, FSL Trust was back in compliance with the terms of its loan agreement after needing six quarters of loan covenant relaxations from its lenders.

Since then, it has kept up its profitability momentum, posting a net profit of US$14.1 million in FY2015. An even better FY2016 appears to be on the cards, as it has already chalked up a net profit of US$10.7 million for 1HFY2016.

The Trust remains in a strong position despite challenges in the shipping market because of its diverse and strong mix of long-term charters and managed market exposure in better sectors, according to the CEO in its media release for its 1HFY2016 financial results.

Mr Hatton received the Young Person of the Year 2016 Award at the 9th Seatrade Maritime Awards Asia for turning around the business during the industry slump.

FSL Trust has a modern, high quality and diversified portfolio of 22 vessels consisting of five containerships, twelve product tankers, three chemical tankers and two crude oil tankers.

12 vessels were employed on long-term bareboat charters as at 30 June 2016 and have a dollar-weighted average remaining lease period of approximately three years (excluding extension periods and early buy-out options).

The remaining ten vessels are employed on time charter arrangements and in pools. The combined portfolio of 22 vessels has a dollar-weighted average age of approximately nine years.

LQM 0094FF FSL Trust is looking at refinancing a loan which is due to expire in Dec 2017. I expect that once this is done, the Group can resume its dividend distribution.

Last year, the Trust announced the acquisition of a new MR tanker for US$21.8 million, financed in full through cash reserves built up since late 2013.

This represents a significant milestone after several years of financial issues and non-compliance with loan covenants. That new acquisition will have a positive effect on the Trust’s ability to generate cash in the future.

FSL Trust is looking at refinancing a loan which is due to expire in Dec 2017. I expect that once this is done, the Group can resume its dividend distribution.

Comments

#1 fishtank 2016-09-18 00:03

FSL disposed 2 vessels in Q1, reporting a loss on disposal.They received 9.6m after a 4.1m loss on disposal. This means the realizable price of the vessel was only 70% of the recorded value. Granted that not all vessels be sold at 30% discount to recorded value, a 20% discount to its assets on the balance sheet will be more reflective of the realizable value of its ships in this environment.

Depreciation SHOULD be included when looking at profitability because unlike properties, ships are depreciating assets and FSL will have to replace them constantly to remain competitive with a younger fleet.

Therefore, once these two factors are taken into account, while still a good value, FSL is not as undervalued as expected.

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FSL TRUST: Strongly Cash Generative Business

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