First Ship Lease Trust - UOB Kay Hian 2022-10-05: Potential Beneficiary Of Smoother Sailing Times Ahead

FIRST SHIP LEASE TRUST (SGX:D8DU)

First Ship Lease Trust - Potential Beneficiary Of Smoother Sailing Times Ahead

With 8 tankers that are on fixed-rate period charters, First Ship Lease Trust (FSL Trust, SGX:D8DU) enjoys a high degree of cash flow certainty. In 2Q22, FSL Trust had 89% fleet utilisation and its financial position has improved markedly vs the pre-COVID-19 period.

Since 2Q19, FSL Trust has undergone an asset recycling strategy, selling off 10 of its older vessels.
FSL Trust’s 1H22 DPU of US$0.016 implies a yield of over 21%.

With the Aug 22 disposal of a product tanker, all of First Ship Lease Trust (FSL Trust)'s fleet now operates under fixed-rate period charters. These charters arguably formed the backbone of the company’s steady cash flow through the peak of the COVID-19 pandemic. This was seen in FSL Trust’s ability to swing back to a net profit of US$2.1m in 2Q22 vs a net loss of US$0.5m for 2Q21.
FSL Trust's operating cash flow and free cash flow for 2Q22 were US$2.8m and US$21.4m respectively, with the latter positively impacted by sales of vessels.
FSL Trust’s contracted revenue up to 2029 is US$31.8m, with two vessels up for contract renewal at the end of this year (one of which has a one-year option).

Over the 3-year period to Aug 22, FSL Trust reduced the size of its fleet from 18 vessels to eight, with three of those sales occurring in 2022 alone. This has resulted in its current fleet, with an average age of 16 years, being only specialised tankers and all of them operating under bareboat charter to James Fisher & Sons.
We expect FSL Trust to recycle its capital and pivot towards acquiring newer vessels that are environmentally-friendlier or assets that are in the renewables or upstream oil & gas industry, thus encouraging greater business sustainability and longevity.

As at end-2Q22, FSL Trust had net cash of US$9.4m which is a significant turnaround from its net debt position of US$13.2 in the year-ago period. This could allow the company to increase its gearing to acquire younger and more fuel-efficient vessels, and also potentially enter new market segments.

Despite the COVID-19 pandemic, FSL Trust's dividend per unit has trended up over the course of 2019 to 2022 to date with DPU of US$0.015 in 2019, US$0.03 in 2020, US$0.035 in 2021 and an interim 2022 DPU of US$0.016. See FSL Trust's Dividend History.
We highlight that in 2H22 to date, FSL Trust has sold two vessels for an estimated US$25.6m equating to US$0.014/unit. As a result, FSL Trust’s potential 2022 DPU of US$0.03 would equate to a yield of 40.0%.

Due to its past performance, FSL Trust has a low and negative z-score which may signal that the company is in distress. (A z-score below 1.8 signals the company is likely headed for bankruptcy). However, it is worth noting that the z-score focuses on past performance which may not equate to future performance.
Further, companies that were in similar boat as FSL Trust during the pandemic have also reported negative z-score and are recovering well from COVID-19.
Coupled with stronger market fundamentals, management is confident that FSL Trust is healthy and will be able to generate profits in years to come.

Singapore Research Team UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-10-05

SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000