• Projected distribution yields of 47.0%/8.5% for FY21e/FY22e.
• Diversified lease portfolio and vessel employment provide downside protection through contracted revenue as well as freight-rate upside potential. US$29.8mn of contracted revenue as of 31 December 2020.
• Initiate coverage with BUY and TP of S$0.105. We peg FSL at 1.0x FY22e P/B, higher than its 10-year historical average of 0.34x as we see value yet to be unlocked from its current fleet. The trust has been disposing of vessels that are not deemed profit-making.

Company Background

FSL Trust is a Singapore-based business trust that owns a fleet of vessels in various shipping sub-sectors. It leases and charters vessels on long-term bareboat charters to the international shipping industry and short-term time charters. It also charters out its vessels through pools, revenue-sharing agreements (RSA) and the spot market. It currently operates 12 tankers of different types. Seven product tankers are chartered to international shipping companies on fixed-rate period charters, two chemical tankers on time charters and three product and crude oil tankers employed in pools or RSAs.

Investment Merits

1. Attractive distribution yields. Since its return to profitability in FY19, the trust has been making distributions to its unitholders. FY19/FY20 DPS was 1.50/3.00 US cents, representing yields of 23.1% and 46.2%. Projected distribution yields for FY21e/FY22e are 47.0%/8.5%. FY21e yield is expected to be about the same as FY20 thanks to cash inflow from the sale of new LR2 vessels and lower loan repayments.
2. Diversified across segments and vessel sizes. FSL’s diversified lease portfolio provides downside protection. On one hand, period employment of its vessels – US$29.8mn of contracted revenue as at 31 December 2020 – provides contracted, secured revenue while freight-rate upside potential comes from vessels employed in pools/RSAs. Overall returns are improved by pools and RSAs. In FY19, 59.2% of bareboat charter equivalent (BBCE) revenue was derived from fixed-rate bareboat and time charters, with the remaining from pools/RSAs.
3. Financial flexibility. FSL Trust ordered two new LR2 vessels in 2018. On 17 February 2021, it entered into an agreement to sell the two tankers, as new regulations introduced in 2020 largely restricted the operations of such tankers, coupled with weak market conditions. The agreed selling price was US$52.5mn per vessel, while they were acquired in December 2018 for a total of US$97.6mn, yielding a gain of US$7.6mn. Gearing is expected to decrease from 18.7% in FY20 to 10.1% in FY21e as the trust turns from net debt to net cash. This should provide debt headroom for future growth via new vessel acquisitions.

We initiate coverage with a BUY rating. Our target price of S$0.105 is pegged at 1.0x FY22e P/B, and at the higher end for peers. We believe there is value yet to be unlocked from the current fleet.

REVENUE

FSL provides leasing services on a bareboat charter basis to the international shipping industry. Other vessels are employed on short- to medium-term time charters or in pools.

Under bareboat and time charters, FSL’s assets are leased to international ship operators such as James Fisher (FSJ LN, Not Rated), which is a leading provider of marine and specialist engineering services. Each lessee has possession of the asset and pays rent to the lessor for the right to use the asset. Pools are joint ventures between ship owners to benefit from risk diversification and higher bargaining power with charterers. In FY19, 52.6% of FSL’s BBCE revenue was derived from fixed-rate bareboat charters (Figure 1).

On 3 February 2021, it reached an agreement with James Fisher to renew charters for three product tankers whose leases expired in 2020 and two product tankers with maturities in January and June 2021, for up to eight years. Its FY21 revenue mix is not expected to change if FSL Trust does not dispose of other vessels. The percentage of BBCE revenue from fixed-rate bareboat charters could increase if FSL Trust disposes vessels under time charters or employed in pool/RSAs.

Contracted revenue was US$29.8mn as at 31 December 2020 (Figure 3).

Newbuildings. In December 2018, FSL ordered two new 114,000 DWT LR2 product tankers. The ships were built by COSCO Shipping Heavy Industry (Yangzhou) (COS SP, Not Rated). LR2 refers to long-range 2 vessels with weights of 85,000-125,000 DWT.

FSL has signed an agreement to sell the two new vessels to a third party, at US$52.5mn per vessel. The selling price is commendable, given weak market conditions with TCE rate for VLCC hitting new low of US$17.2k for 4Q20, a decrease of 65% from 3Q20.

Outlook. We expect TCE (time-charter equivalent) rates to remain low in 2021 with the smallest extent of decrease of 7% from 2020 for MR clean tankers to US$15.8k, and largest extent of decrease of 50% from 2020 for VLCC dirty tankers to US$26.6k (Figure 12). We also project for FSL Trust to dispose of vessels currently employed under time charter and pools/RSA, with net proceeds of approximately US$40mn.

Source: Phillip Capital Research - 22 Feb 2021