Market Gem: FirstShipLease Trust

Core Business:
-(FSL) First Ship Lease
-Highlighted in blue: Writtern in the context of a bicycle shop for better understanding

Its simply a business that collects money from a lot of people, use/manage and invest that money to buy boats, then rent it out to shipping companies, in which these companies pay FSL the rent fees in which these fees go into paying all other expenses, whats leftover will be distributed to Shareholders. Think of it as one of the bicycle rental shops you see in East coast Park, where you're one of the owners of this shop, renting bicycles to families ,kids and friends wanting to have a good time.

Why i pick this stock?
-Diverse Revenue Sources.

With 23 ships, they consisting of seven container ships, nine product tankers, three chemical tankers, two dry bulk carriers and two crude oil tankers. In other words , our shop has many different type of bicycles to rent, bicycles that are specialised for beginners (three wheel), adults, professionals and for lovers( twin sitter) to capture the demand of the many people in east coast park, unlike other shops which only have one type of bicycle (etc: Rick marine)

-Young Fleet

As the company buys mostly new ships, its fleet’s average age is only about four years, compared with the industry’s average 9.3 years. The young fleet, combined with an aggressive growth strategy by acquisition ensures stable cash flow which will buoy its hefty dividend.
So apparently this bicycle shop of ours, was just set up, the bicycles we ordered are made from China,Korea,Japan and Romania are all very new and have been fully rented out.

-High Earnings Visibility

FSL rents out ships with very long-term contracts of about 10 years on average, This allows FSLT to maintain a high proportion of contracted cash flows while the staggered expiry profiles enable contracts to be renegotiated at different time, thus mitigating business cycle risk.
Due to some crazy event happening at east cost park, customers who rented our bicycles, wanted to rent it for 10 long hours, in doing so, contracts and ICs of the bicyclists have been signed and taken respectively :), remember the longer our customers rent from us, the more money is made.

-Bare boat Charter

(Not subject to crew and fuel cost)FSL only enters bare boat charter with its lessees which means bunker charger and lubricant oil will be borne by bare boat charterers, not FSL. Its as good as saying , the maintenance of the bicycle, like lubricating the wheels, pumping the tires, repairing any spoiled parts will be done by the cyclists themselves and not the rental shop. Thus this will result in more money earned by our shop.

- FSLT has range of financial solutions .

Against this backdrop, FSLT is able to offer a range of financing solutions which will
maximise the value of their capital and this includes 100% financing and flexible lease structures which include purchase, extension and early buy-out options, and fixed and
floating rate leases. FSLT is able to finance a range of vessels such as crude oil and product tankers, container vessels and dry bulk carriers.

-Deliciously high dividend yields

"As mentioned that the forecast DPU for FY 2008 is expected to be 10.432 US Cents per unit. This translates to about 2.61 US cents per share, or about 3.57 Singapore cents using a rate of 1.37 to the USD. This would mean a potential DPU of 14.30 Singapore cents for FY 2008;Thus, Management is taking a big risk that the unit price will adjust upwards significantly so that equity issuance can be done at a higher premium to the current market price. implying a forecast dividend yield of 12.4% at today's closing price of S$1.15 per unit." -by Musicwhiz.

Thus if you relate this to our bicycle shop, whatever amount received at the end of the day or month mostly belongs to you

Threats:
· Largest risk is the credit risk associated with its lessee base

The fear of defaulting payments from clients, just like some people who run away with the bicycles and you realise that the ICs they gave you belongs to other people.
-Though these risks have been minimised through screening of clients and diversifying client base. Industry outlook is not looking good, with global recession at hand, credit risk of clients are heightened. With this in mind, i took the liberty and do abit of research on FSL's current clients, looking into their solvency, current ratio etc

http://www.box.net/shared/qajelqpevp

The only clients that im not happy with, its Groda Shipping, Geden and Siba Ships. I will need to call FSL's IR (Investors' relations) to find out whether they have more knowledge on their clients. But since the management is very experienced in their industry, i suppose that these few companies are credible. This is the probably the main reason why, the share price have dropped from $0.96 IPO pricing to $0.455

· Residual value is subjective to shipping rent rates

-The average lease IRR of 7.5% taking into account the cost of the vessel, lease revenue and an assumed residual value based on a 20-year average. If shipping rent rates continue to fall, then FSL have lower their shipping rent rates as well, in doing so, reducing the amount of dividends received. If there isn't enough demand for bicycles, rental shops have to lower their rental rates to remain competitive, this will also pressure our rental shop to do so, thus unable to maintain continue high rate of dividend payouts.

· Asset values could decline in a cyclical downtime

-Thus affecting NAV per share, however as stated by DBS FSLT is not allowed to sell vessels that are under bare boat charter leases. Thus, any revaluation is purely academic.

· Equity markets not conducive to raise funds.

-Obvious, today as of this writing, the financial world experiencing credit crunch and all, FSL share price have dropped, resulting in high cost of equity, cost of debt should also raise in such uncertain times. Therefore any plans to expand fleet have been limited or reached their limit.

-Taking into account this problem with expanding yields might not be that high in the near future, as funding by debts is already limited by their policy 1:1. Therefore might be a possibility that the management will cut back on dividend pay outs, so that internal funding might be established. Its like, our bicycle manager, who wants to import more bikes, however not enough money to do so, because he has been giving out alot of money in the past and not keeping enough reserves to buy up more bicycles. He cannot go to the bank to draw more loans, because he has drawn enough and nowadays people don't dare to invest in anything, especially new businesses in asia.

-Funding for loan repayment problems: Of course there is that problem with refinancing loans that are borrowed by the company, with the first few loans expiring in 2014, it is in my hope that by then, the markets will recover from this crisis and able to fund these loans either through equity or internal funding or via more loans. Whatever the case, this risk is still


-Their industry outlook:

Not looking good, with the impending global recession and credit crunch which will adversely affect the growth in the shipping industry. For bare boat chartering the competition was few and fragmented. FSL stands a good chance in this industry.


Future Growth Drivers

· FSL Trust’s growth strategy is to grow vessel portfolio through asserted acquisitions with long-term bare boat charters. Upon the successful closing of the 3rd Yang Ming vessel by the end of October 2008, FSL will have a fleet of 23 vessels.

· More marketing by them, to help investors understand their business model. This fact will be another catalyst in the future that might push up prices

Having brief looked through at the fundamentals of the company, the next important fact is to look at the price you pay for this company. As stated earlier in this article, at a price of $1.15, the forcasted total dividend yield for 2008 is 12.8%. Now, because of the crisis and all the other crap, the share price now as of Dec 1th 2008 is 0.455, which represents an estimated yield of 37%!!! In other words, you will recover your capital within 2.5 years, this is provided that FSL maintains its dividend payout at $SG0.15cents per year. With reference below,

Margin of Safety

Current Share price: $0.455 as of 1st DEC 2008

The Nav per share: $SGD0.84 (as stated in their fact sheet)

Adjusted Nav: $0.70

Intrinsic value: $0.69/$1.16/$1.95

Using Gordon's Dividend Discount Model, i calculated the share price to be $0.69 using a Pessimistic assumption that FSL DUP falls to 2007 figure, with No growth for the next ten years
An Intrinsic value of $1.16 with an average assumption of using 2008's yield , with no growth
And finally an optimistic assumption of $1.65, using 2008 yield with no growth for the first 3 years followed by a 10% growth for the subsequent 7 years.

Percentage discounted: at least 50% margin of safety as compared to NAV per share

Confused? Don't be! Just know that these are the targeted price to sell (should share price raises in the future) based on your own understanding of the company's outlook, risk and business. Come on, at a price of 0.455 per share is a ridiculously good offer in my opinion and should the company go down under, you are expected to receive at least around $0.84 . It just like paying $400 for the entire bicycle rental shop with all the new bicycles worth about $800 and still have the potential to earn more money from renting them out.

Additional Information

I wrote and called the IR for additional information, this is what i got.

Dear Sir/Mdm, thanks for taking time to read my email, i have some questions regarding FSL trust.

As a retail investor, i would like to know if whether any internal management, CEO, CFO etc was there any buying or selling of their holdings recently?

Secondly, the trust have loans tranches A/B expiring in 2012 and 2014 respectively, in light of this, what steps are being taken to ensure the trust is able to pay up in full and in time?

Lastly, should the market recovers in the near future, are there any measures taken to educate investors about these new shipping trusts? What i mean is, many investors are turned off by the low EPS, ROE and high PE ratios stated in BT (Business Times) and the annual reports, what these investors might not know is that most of the income has been given back to shareholders, that is why EPS and ROE are low and PE is high?

Looking forward to your reply

Thanks
Akat

His reply:

Dear Akat,

Thank you for your email.

The CEO and CFO are board directors of the trustee-manager and their transactions in FSL Trust units need to be publicly disclosed. You can find the disclosures at http://www.firstshipleasetrust.com/ir_newsroom.html. The CEO and the CFO each bought 50,000 units on 22 Oct and 23 Oct respectively.

The first loan tranche is due in 2012 which is more than three years away. We do not know how the markets will behave during this period. However, the preferred option would be for FSL Trust to increase its asset portfolio via an equity raising or through other forms of unsecured capital. Depending on the amount to be re-financed, the re-financing would be supported by fresh unencumbered vessels and the existing asset portfolio. In the "worst case" scenario whereby FSL Trust is unable to re-finance the loans, FSL Trust will re-negotiate with the lenders with a view to amortize the loans over the remaining life of the leases. This is no different from a typical ship finance mortgage loan profile.

Our investor relations programme is on-going and we do not intend to wait until the market improves to engage the investment community. The trustee-manager has been on roadshows in Singapore, Asia and the US to promote FSL Trust to institutional investors while in Singapore, it has participated in seminars organised by SGX and SIAS. These efforts, along with regular updates to the FSL Trust corporate website, will continue.

We thank you for your support. Please do not hesitate to call me on +65 6825 8027 if you need further clarification

Regards

XXX

Last words
A waiting bird, never get the worm.
FSL is a rather new concept to the investing world, its like a unit trust but the assets are based on renting out ships and not real estates, the trust does not have a long history, but are managed by people with long experiences in the industry.

Many people tell me to avoid industries like shipping, properties, tourism and retail, just wait for the right time to invest. But my concept of investing is to buy LOW and sell high, and by the time is right, the price of this share will no longer be low , but high. Why wait for the economy to recover then start to invest? This is what i don't understand, and many friends think that way too! Their reasoning is that if the economy recovers it will be much safer to invest. But Cmon guys, shouldn't safety be measured by how much discount you got from buying the stock and not how many people already gone invested in that stock? Think about this, good discounts are everywhere, why wait?

Ps: Thanks to Musicwhiz, DBS asset management, Business Times for all their information and help.