First Ship lease Trust (FSLT) has proposed a share placement of up to 100m new units at an issue price of between S$0.525 and S$0.575 each, or not more than a 20% discount to S$0.59. Assuming 100m units (19.3% of existing share capital) are issued at S$0.59 each, the proceeds of S$59m will be used for vessel acquisitions.
FSLT has recently reaffirmed a quarterly DPU of 1.5 US cents from 3Q09 onwards. Based on a placement price of S$0.59, we estimate cost of equity at 14.6%, which seems high. While it is difficult to estimate the effect of FSLT’s proposed vessel acquisitions, shipping trusts generally do not undertake acquisitions that are not accretive. However, the management is targeting for a gross asset yield of 15% p.a.
While FSLT’s lessees have been making lease rental payments promptly, we do not rule out the risk of default by its charterers.
Although FSLT did not apply the distribution reinvestment scheme (DRS) for 2Q09, the scheme has a dilutive effect on its DPU and yields. No change to our earnings forecast as the placement price and the number of new units to be issued have not been determined.
Reiterate HOLD and maintain our fair price of S$0.64 based on 0.8x 2010F P/B of the container shipping sector. We suggest entering at S$0.52. Reasons for maintaining HOLD.
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