Pacific Shipping Trust: No respite yet

Container market continues to struggle. A new Drewry Shipping Consultants' report projects a 10.3% market contraction in global box traffic over 2009, and a small 1% growth next year. It estimates that 27m fewer TEUs will be handled for the year than in 2007. Drewry also says "continued unsustainable freight rates" are pushing smaller companies to the brink of financial collapse. The head of Maersk Line said in an interview last week that growth in shipping volumes in 2010 is unlikely - he expects capacity utilization in the industry to fall further over the next 12 months . July is a key month as some major liners implement widely publicized rate increases. Trans-Pacific carriers have also proposed rate hikes starting August to bring freight rates back to 'compensatory levels'. It remains to be seen if these increases take hold in the broader market.

CSAV uncertainties remain. Pacific Shipping Trust (PST)'s negotiations with its charterer, CSAV, have yet to be formally resolved. CSAV won concessions from other ship-owners in late May. According to Lloyd's List, charter rates for 85 vessels will be cut by 36% for two years with the owners accepting half of the cash equivalent of the rate reduction in terms of shares in CSAV. It is unclear whether a renegotiation with PST, which has two vessels chartered out to CSAV, would parallel this deal or take another shape entirely. CSAV has also raised US$145m in new equity with the sale of more than 300m new shares in the company. Counterparty risk of default (on CSAV) has certainly moderated and we are more sanguine about how negotiations play out. Nonetheless, the devil is in the details and there is no guarantee that the ultimate deal will be equally favorable to both sides. The reaction of PST's lenders to any concessions granted is also an unknown.

Valuation. PST faces uncertainty on two fronts - the CSAV renegotiation and a sickly container industry. Industry concerns are a deeper and likely more protracted overhang on PST in our opinion. Current price levels present deep value but with little evidence of an imminent industry turnaround, we think it is presumptuous to turn buyers. We bump our fair value estimate up to US$0.24 from US$0.16 to reflect moderated risks on the renegotiation. This represents a 30% discount to our 'normal' case discounted FCFE value of S$0.34 (10% discount rate). Our estimates (which assume a 30% cut in charter rates to CSAV) are unchanged. Maintain HOLD.

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