FSL a value buy.

First Ship Lease Trust ("FSL Trust") is a Singapore business trust that currently owns a diversified portfolio of 23 modern vessels comprising tankers, containerships and dry bulk carriers. FSL Trust leases its vessels on long-term bareboat charters to international shipping companies and derives stable cash flow from the lease rentals. As at 31 March 2010, FSL Trust’s lease portfolio has remaining contracted revenue of US$743 million over an average remaining lease term of 7.5 years. As stated on the company's website.
Now an update on FSL, an unfortunate event has occurred to the company, both of its ships ‘Verona I’ and ‘Nika I’ that is leased by Groda Shipping Ltd have requested FSL to retake those ships and have defaulted on bunker payments. To summarize the negative impact this have on FSL is that in total, FSL have to cough out about US 10million to settle the problem.

Now as value investors, we tend to look at problems as opportunities, problems that can provide value investments that is. So as mentioned this is the value i see in FSL

Simple Qualitative analysis which is looking at business advantage
1) Business wise, FSL will use the 4.8million in its cash position to release the ships that is being retained in the both countries; this is estimated to take about 1-2 weeks to release the ships.

2) The 4.8million used to release the ships is claimable, it just a deposit with the court to release the ships.

3) There will be litigation or lawsuit with Groda shipping Ltd for causing these problems.

4) The client Rosnett will most likely take the ships back since Rosnett is a client of Groda who uses FSL ships,

5) Nevertheless even if Rosnett doesn’t want to lease back the ship back under their control,

according to the FSL's investor relationship (IR), they have been proactive in looking for clients and do have some potential clients wanting to rent their ships.

6) Recall that FSL ships are young and have substantial value to them.

7) According to FSL, interest payments to loans will not be charged higher by creditor because of

this incident.

8) As stated in their new statement, the rest of the 21 ships provide the trust with Strong Cash flows.

9) FSL Trust was the only Trust which employed a full time risk assessment officer to assess the credit-worthiness of potential lessees on an ongoing basis

Quantitative analysis which looks at price advantage

Price as of June 13 2010, is 0.37 this gives a
1) Net asset value advantage of: $0.62- $0.37=$0.25 about 67% below NAV

2) Calculation of expected yield for the this year, 1st Quarter already paid 1.5 US cents

3) 2nd Quarter guesses will be a conservative estimate about 0 US cents*

4) 3rd Quarter guesses will be a conservative estimate of 0.75 US cents

5) 4th Quarter guess will be back to 1.5 US cents

6) Total Dividends collected: 4 US cents = 5.6 Sg cents (conversion rate of 1.4)
Assuming that from 3rd quarter onwards the problem with Verona and Nika is settled by then, a 0.75 DPU is estimated to be given
Then for the 4th Quarter i assume the business trust FSL is back to it's normal routine with 55% dividend pay out policy a 1.5 US cents will be dished out once again.

7) Therefore my estimate of an annualized return will be about 15% dividend yield at a price of 0.37 per share

Now, let us consider some of the risks to my assumption and risk in general relating to FSL

Risk to FSL
1)* FSL have already incurred a one time 10million cost due to this problem, because of that there might not even be dividends this coming quarter (2nd Quarter).This is the reason why i think for the 2nd quarter, there will not be dividend is because of the case with Verona and Nika, the complications , the extra cost etc having to take these into consideration, a 0 DPU (Distribution per unit) for the 2nd quarter is to me a conservative estimate.

2) The other risk here is that, Nika and Verona are not being release due to other unforeseen problems, the longer the delay the lesser the future dividend payout.

3) Another risk is that, the other 21 ships might have problems due to furture economic problems like in the UK region. FSL clients like Siba Ships, James Fisher and Schoeller Holdings are are from Europe/UK represents 25% of the total revenue to FSL. Could be vulnerable to any future weakness

On a side note: It’s weird that in 2008 when i bought FSL at 0.47 cents, I called FSL's IR about the shipping company Groda, telling them that this company do not have any significant data on their economic moat and financial statements, i asked the IR how they know whether is a quality client to FSL? Their reply if i remember correctly was that this is a growth company, sort of a potential client to have.

4) Through out 2008 to 2010 the NAV of FSL have changed from $1.10 to 0.84 to 0.66 and finally to 0.62, this dropping value in NAV is quite a concern to me, well some ppl might say it is due to the world depression and devaluation of asset, but as a investor i have to be vigilant on this , as NAV per share is one of my favourite yardsticks to determining MOS (Margin of Safety)

My estimate of FSL intrinsic value in the next 7 years will be worth

$0.62-0.70 today. this value is based on a very conservative estimate that FSL DPU in 2017 is a miserable SG 0.08 cents.

Some comments

So the question is at 0.37, is FSL a value buy? Is the probability of benefits higher than the unknown risks involved? Do you see the current problem with FSL a long or short term problem? Is there an opportunity here?

My answers: Yes, Higher, Short and Yes. =)