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SHIPPING TRUSTS Powered By Docstoc
					                                                                                                                                                         June 26, 2008

                                                                                                                                SINGAPORE EQUITY
                                                                                                                                 Investment Research

                                                                          Sector Report                                                           Private Circulation Only

Terence Wong CFA
+65 6232 3896                                                             SHIPPING TRUSTS                                                      UNRATED
Serene Lim
+65 6232 3897                                                             Demystified

                                                                          “Where in the world can you find a stable asset that can give you 11% tax-
FSL 6-month Share Price                                                   free?” lamented the senior management of a shipping trust rhetorically in a
                                                                          recent meeting. His frustration is understandable. A couple of years after
1.35                                                                      the listing of Singapore’s first shipping trust, the market has continued to
                                                                          ignore them despite boasting the best yields. We believe that it is due to a
                                                                          lack of critical mass as well as understanding of the trust dynamics. In this
                                                                          paper, we will deconstruct and demystify this fledgling asset class.

                                                                          Shipping Trust & REIT – Same Difference? There are quite a few similarities
                                                                          between shipping trust and REIT, with a key characteristic being the fact that both
                                                                          pay out of their cash earnings, rather than accounting profit. Despite the striking
  21-Jan-08   20-Feb-08   21-Mar-08   20-Apr-08   20-May-08   19-Jun-08
                                                                          similarities, the three listed shipping trusts – First Ship Lease Trust (FSL), Pacific
                                                                          Shipping Trust (PST) and Rickmers Maritime – have yet to garner the same level
PST 6-month Share Price                                                   of favour as its property trust counterparts.

                                                                          Not affected by industry cyclicality. One important point worth noting is that
                                                                          shipping trusts are protected from the movements in the shipping industry, where
                                                                          the booms and busts are notoriously pronounced. The trustee-manager
                                                                          purchases vessels and leases them on long-term (eight to 10 years), fixed-rate
0.40                                                                      basis. This provides clear cash flow visibility and stability to investors, which is
                                                                          particularly important during these volatile times.

                                                                          Look out! It is not all clear blue skies for shipping trust. A potential flashpoint is
  21-Jan-08   20-Feb-08   21-Mar-08   20-Apr-08   20-May-08   19-Jun-08   the counter-party risk, where lessees default on lease payments owing to cyclical
                                                                          nature of the shipping industry. The shipping trusts in Singapore mitigate this by
                                                                          locking in largely blue-chip clients with little default risks. As well, ships, unlike
Rickmers 6-month Share Price                                              properties, have short lifespan (~30 years) and part of the yield may be seen as a
                                                                          capital repayment to investors.
                                                                          Worth a look? Most definitely. The yields, at over 11%, rank the best among the
                                                                          different asset classes in Singapore. We believe that once investors recognise its
1.15                                                                      merits, there will be yield compression and the gap should close with its US-listed
                                                                          peers and the Singapore-based REITs.

                                                                                                                                   Dividend yield
1.00                                                                                                       Price
                                                                                                                                        (%)             Market Cap
0.95                                                                                                                      %                               (S$m)
  21-Jan-08   20-Feb-08   21-Mar-08   20-Apr-08   20-May-08   19-Jun-08                          IPO       Current                 2007       2008
                                                                           FSL                S$1.50*      S$1.25       -16.7      10.1       10.3             625
                                                                           PST                US$0.45     US$0.405      -10.0      14.4       11.6             185
                                                                           Rickmers           S$1.57       S$1.16       -26.1       6.6       11.3             422

                                                                          * Listing Price at US$0.98. Conversion based on IPO Exchange rate of US$1=S$1.5291
                                                                          ** Based on exchange rate of 1US$=$1.3700 as at 24 June 08
                                                                          Source: Bloomberg

                                                                                                                                                DMG Research
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DMG Research                                                                                                    June 26, 2008
                     TABLE OF CONTENTS

                     Introduction                                                                  3

                     Shipping Trust & REIT: Same difference?                                       4

                     Investment Risks                                                              7

                     Company Profiles                                                              8

                     Peer Comparison                                                              12

                     Appendix 1: A Deeper Look                                                    15

                     Appendix 2: More about DPU                                                   16

                     Disclaimer                                                                   17

                                                                                                          OSK Research
                                               See important disclosures at the end of this publication   DMG Research
  See important disclosures at the end of this publication                                                                  2

                    Following centuries-old tradition of ship-financing, Germany established the KG model in the 1970s to
                    raise private equity for the financing of projects. It is arguably the most successful ship-financing
                    system, with the German KGs owning one-third of the world’s container fleet.

                    Given that Singapore is both a shipping and financial hub, it was not hard to imagine that there were
                    plans to replicate KG’s success in this region. In 2006, the Singapore government, through the
                    Maritime Finance Initiative (MFI), established the framework for shipping investment funds, with
                    shipping trust being the key structure. The initiative, largely based on German KGs and established
                    under the Business Trust Act (2004), aims to promote Singapore as a hub for ship-financing.

                    In May 2006, Pacific Shipping Trust (PST) became the first shipping trust to be listed. Given the
                    similarities with real estate investment trust (REIT), many investors thought that shipping trust will
                    have a far easier time compared to REIT pioneers like CapitaMall Trust (CMT) and A-REIT, both of
                    which had to struggle a little before gaining investor adoration. The roads have been properly paved,
                    with the hard work of educating the public on trusts already been done. Singapore investors’
                    understanding and appreciation of REIT is the most entrenched in the region, and the shipping
                    cousins should experience a warm welcome by association.

                    However, it was not to be. Two years and three listings later, the market has continued to give the
                    sector the cold shoulder, as they fell an average of 17.6% since their respective IPOs.

                        Figure 1: Not a great start

                                                                       FSL               PSL                Rickmers
                       Listing Date                                 27-Mar-07         26-May-06             4-May-07
                       IPO Price                                     S$1.50*           US$0.45               S$1.57
                       Current Price                                 S$1.25           US$0.405               S$1.16
                       Percentage Chg from IPO (%)                    -16.7             -10.0                 -26.1

                      * Listing price at S$0.98. Conversion based on IPO exchange rate of US$1 = S$1.5291
                       Source: Companies, Bloomberg

                                                                                                                 DMG Research
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                                            See important disclosures at the end of this publication

                    When shipping trust made its debut on Singapore market, many investors called it “Shipping REIT”
                    given the striking similarities with property trust. In this section, we will pit the two asset classes head-

                      Figure 2: Shipping Trust vs REIT

                                                              Shipping Trust                           REIT
                       Legislation Regime                                                              Code on Collective
                                                              Business Trust Act
                                                                                                       Investment Schemes
                       Corporate Governance
                          - Responsible Entity                Trustee–Manager as single                Separate Trustee and
                                                              responsible entity                       Asset Manager
                            - Board of Directors              Majority independent
                                                                                                       Minimum one-third to be
                                                              Fiduciary duty to place
                                                                                                       independent REIT
                                                              unitholders’ interests first owing
                                                              to dual responsibility
                                                              Non real-estate                          Real-estate

                       Depreciation/ Revaluation
                                                              No impact on payout                      No impact on payout
                       Dividend Distribution
                                                              Operating cash flow                      Operating cash flow
                       Gearing Limit                                                                   35% (60% if REIT is
                       Stamp Duty at Trust/Co.
                                                              Waived                                   Waived
                       Taxation at Trust/Co. Level            No (Granted Maritime Finance
                                                              Incentive (MFI) status in                No
                       Taxation at Investor Level
                          - Individuals                       No Singapore withholding tax or
                                                                                                       No tax
                            (Local & Foreign)                 taxation on distributions to both
                          - Local institutions                foreign and local investors
                            - Foreign institutions

                       Source: SGX

                                                                                                                DMG Research
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                    Business model

                    A shipping trust comprises a legal entity, or a trustee, that manages assets on behalf of unit-holders
                    who are the ultimate owners of the assets. It acquires ships and leases out to shipping operators at a
                    higher rate of return (asset yield) than the interest rate on debt incurred to purchase ships. The bulk
                    of the cash profit is distributed back to unit-holders. Shipping trust has the following characteristics:

                    •    Hybrid security with characteristics of debt and equity
                    •    Operates as a business enterprise like a company
                    •    Created by a trust deed under which the trustee has legal ownership of the trust assets and
                         manages the assets for the benefit of the beneficiaries of the trust

                    REIT, on the other hand, separates the trustee and the asset manager.

                    Sub-sectors. There are 2 types of leasing for shipping trust – bareboat charter and time charter. In a
                    bareboat charter agreement, bunker charger and lube oil will be borne by bareboat charterers. In a
                    time charter arrangement, while the time charterer will be liable for the costs of the bunkers, the
                    shipowner is responsible for the ship management costs and hence will be subject to the risk of an
                    increase in fuel costs including lube oil. There are a few sub-sectors within the REIT universe,
                    including residence, serviced residence, commercial and industrial.

                    Hedged against volatility. Investors are protected from the volatility of shipping cycles, as the ships
                    are leased on a long-term fixed rate charters to the world's largest liner companies. The leases on
                    properties in REIT is in the region of three (for retail and commercial) to five (for industrial) years,
                    while those of the shipping trust is eight to 10 years.

                    Growth plans. The Singapore shipping trusts are looking at growth through acquisitions. Similar to
                    the REITs, they have earmarked aggressive acquisition plans – US$450m for Rickmers, US$300m
                    for FSL and US$200m for PST, resulting in much higher gearing.

                    Support from sponsor. Sponsors continue to hold significant interest in shipping trusts after listing,
                    thus demonstrating long-term commitment. Unit-holders also benefit from sponsors’ extensive
                    shipping contacts and networks. Sponsors are also omnipresent in REIT, with the only independent
                    one being Cambridge Industrial Trust.


                    Distribution of cash earnings. Like REIT, a shipping trust allows the company’s cash earnings to
                    be paid to investors, which makes it an especially useful vehicle for companies with large
                    depreciating assets. This vehicle is typically established by companies with relatively stable cash
                    flows. The yields, however, vary. While REITs are trading at an average of 6.9%, shipping trusts are
                    trading at over 10%. One reason is the lack of liquidity in the latter. In contrast, REITs have been
                    investor favourites (both institutional and retail) since 2004. As a result, the Singapore REIT sector
                    has grown from very humble beginnings in 2002 to become the largest market in the region with 21
                    issues spreading across industries and countries.

                    Defensive play. SGX-listed shipping trusts offer relatively high tax-free yield of 10-12%. This should
                    provide some support for their share prices given the current stock market volatility and a cushion
                    against rising inflation. Since it is a relatively new asset class, shipping trust also offer a form of
                    portfolio diversification, just as REIT was being marketed in its early stages.

                                                                                                       DMG Research
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                    Some differences. From the comparison table, there are a few areas that differ. First, with respect to
                    corporate governance, the shipping trust has a trustee-manager as a single responsible entity, but is
                    separate in the case of REIT. Shipping trust observes a higher standard of independence, with
                    independent directors (ID) making up the majority of the Board. For REIT, IDs need to make up at
                    least one-third of the Board. One other glaring difference is the gearing limit, which is set at 60% for
                    REIT, while there is none for shipping trust.

                    Why the gap? But these regulatory differences do not explain why there is such a great discrepancy
                    in performance and yields between shipping trust and REIT. We believe the following should better
                    explain the gap:

                         1) Lack of understanding of the business model. Many investors think that shipping trusts’
                            fortunes ride with the booms and bust of the shipping cycle, which is infamously pronounced.
                            Liquidity is, as a result, lacking. One of the reasons for the success of the German KG
                            system is that there is ample liquidity provided by German investors, who deem ship-
                            financing as a key part of private investment portfolio.

                         2) Higher returns (in terms of yields) may be needed to compensate for a shorter life-span of its
                            asset. Container ships and bulk vessels run for 25-30 years, while properties are typically
                            much longer.

                         3) Size may yet be another issue. The shipping trusts listed here are much smaller than their
                            listed peers in the US, including Danaos Corp, Seaspan Corp and Ship Finance International.
                            This will restrict some institutional investors from investing in the trust.

                         4) Lack of critical mass. With only three shipping trust listed, it has yet to attain a critical mass.
                            As more join the bandwagon, there will be greater recognition and a higher profile for the

                                                                                                         DMG Research
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                                            See important disclosures at the end of this publication
                   INVESTMENT RISKS

                    Counterparty risk. There is a possibility of lessees defaulting on lease payments owing to cyclical
                    nature of the shipping industry. FSL Trust, for instance, mitigates this risk by conducting due
                    diligence on lessees and ensuring that they have a minimum BB credit rating and above. In addition,
                    FSL minimises credit risks by having a diversified portfolio of charterers. Rickmers protects itself by
                    signing up only the top names in the shipping industry.

                    Declining greenback. The dividends are paid out in USD, and actual yield to unit-holders in SGD
                    may decline owing to the weakening greenback. The SGD has appreciated by 6% against the USD
                    since the start of the year, and is now hovering around the 1.37 mark.

                    Vessels are depreciating assets. The useful life of the shipping assets is typically around 30 years.
                    This results in a declining NTA on the balance sheet. In addition, in the event of sale arrangements,
                    the residual value of vessels might not reflect the book value of vessels given the inherent volatility in
                    the shipping industry. However, shipping trust in Singapore generally pay out most of its cash
                    earnings, as mentioned earlier. This essentially means that unit-holders are being compensated for
                    the loss in asset-value.

                    Problems with high yields. The high yields of shipping trusts may not necessarily be a good thing,
                    as it makes yield accretive acquisitions a lot more difficult, crimping expansion opportunities. It does
                    not help that vessel prices have been climbing over the years. The high yields are also an issue when
                    the shipping trusts are gunning to raise fresh capital through equity. More shares are required to raise
                    the funds needed due to low prices, resulting in earnings dilution to existing shareholders.

                    Lack of credit facilities. The current credit crunch environment may limit expansion plans for less
                    accredited shipping trusts in light of the current credit crunch. This may put a halt to yield accretive
                    acquisitions, thus translating into difficulty in growing DPU. Margins might also be squeezed because
                    of increased funding costs.

                    No gearing limit – heightened credit risk. Since there is no gearing limit, banks may tighten and/or
                    increase cost of credit to shipping trusts to account for increased credit risk. Currently, FSL has the
                    highest gearing at 1.16x, followed by PST (0.85x) and Rickmers (0.42x). This will likely go up as a
                    result of their aggressive acquisition targets.

                    New regime may lead to some uncertainties. The Business Trust Regulations came into effect in
                    Jan 2005, while the first set of guidelines were only introduced in Oct 2005. Given the short duration
                    and small numbers (there are less than 10 business trusts in Singapore, including the three shipping
                    ones), it is evident that business trust legislation and regulations have not been tested frequently,
                    leading to some degree of uncertainty.

                                                                                                        DMG Research
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                                            See important disclosures at the end of this publication
                   COMPANY PROFILES

                    Pacific Shipping Trust

                    In May 2006, Pacific Shipping Trust (PST) became the first shipping trust to be listed on the
                    Singapore Exchange (SGX). It is in the business of owning container vessels and chartering them out
                    to reputable liner operators either on long term bareboat charters or time charters.

                    PST is sponsored by Pacific International Lines Pte Ltd (PIL), Singapore’s second largest container
                    shipping company and the 19th largest in the world. PIL owns and operates more than 97 container
                    vessels with close to 140,000 TEUs slot capacity. One of the PIL’s key strengths is in intra-Asian
                    trade and having a dedicated network of services covering a comprehensive range of ports in Asia

                    The initial portfolio of PST comprised of 8 container vessels acquired from its sponsor. Each vessel is
                    under long-term bareboat charters, in which the charterer has possession and control of the vessel
                    for a fixed period of time. This reduces the exposure of PST to volatility in the spot market for
                    container vessels. On 14 Sep 07, two 4,520 TEU ships on time-charter basis were acquired for a total
                    of US$136.2m from PIL.

                      Figure 3: Vessel Acquisitions – PSL

                                 Date                                      Vessel Acquisitions
                              26 May 06             Commences IPO with an initial portfolio of eight container vessels
                                                    Two 4250 TEU ships acquired for US$136.2m from PIL (to be on time
                              14 Sep 07
                                                    chartered to CSAV)
                                                    Two new 1800 TEU ships acquired for US$86 m from PIL (to be on bare-
                              27 Nov 07
                                                    boat charters)

                       Source: Company

                    First Ship Lease Trust

                    First Ship Lease Trust (FSL) began operations on 22 Feb 2007, with its primary objective to invest in
                    diverse ocean-going vessels that would be leased to international lessees pursuant to long-term
                    bareboat charters. FSL has a diversified portfolio comprising vessels of various shipping sub-sectors
                    including containerships, product tankers, chemical tankers, crude oil tankers and dry bulk carriers.

                    Under the terms of each lease, the lessee would have possession and control of the vessel for a
                    fixed period of time and the lessee would be liable to pay a monthly fixed amount of lease hire to FSL
                    and to bear all operating costs and expenses incurred in the operation of the vessel (including all
                    voyage costs, crew-related expenses, insurance and repair and maintenance costs) during the tenure
                    of the lease. Going forward, FSL intends to continue focusing on entering into long-term bareboat
                    charters with a minimum initial charter term of seven years. It also intends to continue to maintain a
                    portfolio of lease assets which are diversified across different lessees and sub-sectors of the shipping

                    FSL is sponsored by First Ship Lease Pte. Ltd. whose shareholders include Germany-based HSH
                    Nordbank and Bayerische Hypo-und Vereinsbank, as well as Cyprus-based Schoeller Holdings.

                    FSL was listed on the SGX on 27 Mar 2007. Since its IPO, the company has grown its fleet from 13
                    vessels to 23 vessels currently. These comprise of seven product tankers, two ice-class product
                    tankers, two crude oil tankers, two bulk carriers, three chemical tankers and seven containerships.
                    The average remaining lease life is at a dollar weighted average of 9.2 years.

                                                                                                       DMG Research
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                                            See important disclosures at the end of this publication
                      Figure 4: Vessel Acquisitions – FSL

                         Date                       Vessel Acquisitions
                         27 Mar 07                  Commences IPO with an initial portfolio of 13 vessels
                         01 June 07                 Acquires three product tankers from James Fisher for US$45m
                         07 Nov 07                  Acquires two product tankers from Groda Shipping for US$113m
                         21 Apr 08                  Acquires two crude oil tankers from Geeden Lines from US$140m
                         12 May 08                  Acquires three containerships from Yang Ming Transport Corp for

                       Source: Company

                    Rickmers Maritime

                    Rickmers Maritime, which was listed on 4 May 2007, was formed with the objective of owning and
                    operating containerships under long-term, fixed-rate charters to container liner shipping companies.
                    Rickmers, which has a contracted asset portfolio of 10 containerships with long-term, fixed-rate time
                    charters in place at the time of IPO, boasts a fleet of 23 containerships currently.

                    It charters a larger class of containerships, typically the 8,000 TEU and above, or the smaller Post-
                    Panamax ships. A time charter is a contract for the use of a vessel for a fixed period of time at a
                    specified daily rate. Under a time charter, the vessel owner provides crewing and other services
                    related to the vessel’s operation, the cost of which is included in the daily hire rate. The charterer
                    would pay the voyage expenses, which include all expenses relating to particular voyages, such as
                    bunker expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and

                    Rickmers is sponsored by the Rickmers Group and is primarily owned by its chairman, Mr. Bertram
                    R.C. Rickmers, whose family has been involved in the shipping industry for over 170 years. This
                    enables Rickmers to capitalise on the established reputation and relationship of the Rickmers Group.
                    In addition, Rickmers is the exclusive vehicle of the Rickmers Group for acquiring, owning and
                    operating containerships of at least 3,450 TEU that are subject to charters of more than a year. In
                    such an arrangement, Rickmers is granted the rights of first offer to purchase any containership of at
                    least 3,450 TEU.

                    Rickmers has adopted a distribution policy to make a regular quarterly distribution of US$0.0214 per
                    Unit (referred to as “base distribution”) while reinvesting a portion of its operating cash flow in its

                      Figure 5: Vessel Acquisitions – Rickmers Maritime

                       Date                         Vessel Acquisitions
                                                    Commences IPO with an initial portfolio of five vessels with an additional
                       4 May 07
                                                    five to be acquired within 12 months of IPO
                                                    Acquires 13 containerships from Polaris Shipmanagement – nine 4,250
                       19 Mar 08
                                                    TEU vessels and four 13,100 TEU vessels

                       Source: Company

                                                                                                          DMG Research
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                                            See important disclosures at the end of this publication
                       Figure 6: At a Glance

                                               FSL                            PST                             Rickmers
                           Description         Provides leasing               Provides leasing                Provides leasing services
                                               services on a long-term        services on a long-term         on a long-term time
                                               bareboat charter basis         bareboat or time charter        charter basis to container
                                               to the international           basis to shipping liner         liner shipping companies
                                               shipping industry              companies

                           Sponsor             First Ship Lease Pte.          Pacific International           Rickmers Holding GmbH
                                               Ltd.                           Lines                           & Cle. KG
                           Trustee-            FSL Trust Management           PST Management Pte.             Rickmers Trust
                           Manager             Pte. Ltd.                      Ltd.                            Management Pte. Ltd.
                           IPO price and       US$0.98                        US$0.45                         S$1.57
                           Date                27 March 07                    26 May 06                       4 May 07
                                               S$625m                         US$135m                         S$422m
                           Key                 FSL (30%); DWS,                Pacific International           Polaris Shipmanagement
                           Unitholders         Frankfurt (8%); AIG,           Lines (35%), DBS                (38%), Fidelity
                                               Singapore (8%) &               Group Holdings (11%),           Management (12%), UBS
                                               Penta Investments              Oceanic Investment              AG (10%)
                                               Advisers, Hong Kong            Management (5%)
                           Portfolio           Containerships, product        Containerships                  Containerships
                                               tankers, chemical
                                               tankers and dry bulk
                           No. of              22 (As at 16 Jun 08)           10 (As at May 08)               11 (As at 10 Jun 08)
                           Vessels             [3 Yang Ming vessel to         [2 additional                   [12 additional
                                               be delivered by October        containerships to be            containerships to be
                                               08]                            delivered by Nov 08]            delivered by Sep 10]
                                                         2                                                               3
                           Ave Age of          3.2 years                      4.0 years                       1.45 years
                                                           2                                                               3
                           Ave                 9.2 years                      6.5 years                       7.22 years
                           Lease Life
                           Fixed               US$917m                        -                               US$2.1b
                           Distribution        100% of all available          Minimum 90% of                  Base distribution of US
                           Policy              cash flow                      available cash flow             2.14 cents per quarter
                                                                                                              while retaining a portion
                                                                                                              of cash flow for
                                                                                                              [Raised to 2.25 cents
                                                                                                              beginning 2Q08]
                           Distribution        USD                            USD                             USD

                         Converted to S$ denominated Trust Units from 30 Nov 07
                         Dollar weighted average as at 31 May 08 and assuming addition of all 3 Yang Ming container vessels as at 31 May 08
                         Addition of 5 out of 13 vessels to be delivered by 31 Dec 08

                           Source: Companies

                                                                                                                        DMG Research
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                                               See important disclosures at the end of this publication
                         Figure 7: 1Q08 Financial Performance

                                                           FSL          PST               Rickmers
                        Revenue (US$m)                     16.61        8.85              22.33
                        Net Profit (US$m)                  1.71         0.47              8.39
                        Operating Cash Flow                14.29        8.27              16.93
                        Amount available for               12.95        3.27              9.07
                        distribution (US$m)
                        No. of issued units                500          337               423.7
                        DPU (UScts)                        2.59         0.97              2.14

                       Source: Companies

                                                                                                         DMG Research
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                                              See important disclosures at the end of this publication
                    PEER COMPARISON

                       Figure 8: Singapore Peers

                                              Share Price                                 Dividend yield (%)*
                                               (As at 24
                          Company              June 08)            Market Cap              2007            2008
                        FSL                     S$1.25              S$625 m                10.1            10.3
                        PST                    US$0.405            US$135 m                14.4            11.6
                        Rickmers                S$1.16              S$422 m                 6.6            11.3
                        Average                                                            10.4            11.1

                       * DPU paid in USD. Exchange rate of 1US$=S$1.3700 as at 24 June 08.

                        Source: Bloomberg

                       Figure 9: US peers

                          Company                                               Market Cap               Dividend Yield (%)
                                                   Share Price (US$)             (US$m)                  2007         2008
                          Seaspan                        24.87                    1623.1                  7.2          7.6
                          Danaos                         23.15                    1263.0                  7.7          8.0
                          Ship Finance                   29.41                    2139.4                  7.4          7.6
                          Average                                                                         7.4          7.8

                        Source: Bloomberg

                     US vs Singapore. The US-listed ship yielding companies, when first listed, also had to enter some
                     rough seas before winning over investors. Seaspan, for example, traded as high as 9% in the initial
                     period before it saw yield compression as invests piled in. The US-listed comparables are trading at
                     7.6-8% prospective yield, while the shipping trusts in Singapore are going for 10.3-11.6%. We
                     believe the gap will close with time.

                     You are not alone. It seems that it is not only shipping trust that investors are shying away from, but
                     all other business trusts, including CitySpring Trust, Babcock & Brown Global Investments (BBGI),
                     Hyflux Water Trust and Macquarie Infrastructure International Fund (MIIF). They have fallen by 22%
                     from IPO and 38% from their peaks.

                      Figure 10: Business Trusts in Singapore

                                                                                 Percentage            Percentage       Dividend Yield
                                  Company                   Share Price              Chg                  Chg                (%)
                                                               (S$)             from IPO (%)         from High (%)      2007     2008
                        BBGI                                   0.62                 -41.5                 -50.0         17.3     17.3
                        CitySpring                            0.775                 -12.9                 -50.9          9.1      9.0
                        Hyflux Water Trust                     0.64                 -17.9                 -33.0         N.A.      7.6
                        MIIF                                   0.81                 -19.0                 -34.1         10.4     10.4
                        SP AusNet*                             1.46                 -16.6                 -21.1          7.8      7.8
                        Average                                                     -21.6                 -37.8         11.1     10.4

                       * Dividends paid in AUD. Exchange rate of 1A$=1S$1.3050 as at 24 June 08
                      Source: SGX, Bloomberg

                                                                                                                     DMG Research
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                                              See important disclosures at the end of this publication
                        Figure 11: Yields of Various Asset Class

                                 12.0%       11.05%        10.40%


                                  8.0%                                  6.90%

                                                                                                                     2.52%            2.50%

                                  2.0%                                                                                                              0.925%

                                          Shi p p ing   B usi ness   S- R EI T   ST I Y iel d   10 - yr Go vt    5- yr G o vt       C PF         D B S 12 -
                                           T r ust s     T rust s                                   B o nd          B o nd       O r d i nar y      mt h
                                                                                                  Y i el d * *    Y i el d * *   A cco unt         F i xed
                                                                                                                                                 D ep o si t *

                        * Based on a S$1-50K placement amount as at 24 June 08
                        ** As at 24 June 08

                        Source: DMG Compilation

                                                                                                                                                 DMG Research
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                                               See important disclosures at the end of this publication
                        Bottom line. While we do not have coverage of shipping trust, we believe that a case can be
                        made for the sector.

                        1)           High yields. Shipping trust has the highest yields among all asset classes. It will be
                                     looked upon favourably as the markets get increasingly volatile and investors seek safe

                        2)           Investor education. Investors must understand what shipping trust is all about, and it
                                     is good that the three trusts out there have been busy doing that. They will be jointly
                                     conducting a seminar with SGX on 5 July 2008, the second time they are doing so (and
                                     unlikely to be the last).

                        3)           Critical mass. With time, there will be more listings and the profile of the sector will
                                     improve. The joint efforts in promoting the sector will be even bigger than the current
                                     ones. This was observed for sectors like environment/water (with the listing of Hyflux in
                                     2001) and REIT (CapitaMall Trust in 2002), all off which had to endure tough starts
                                     before taking off.

                                                                                                         DMG Research
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                                              See important disclosures at the end of this publication
                      APPENDIX 1: A DEEPER LOOK

                        Revenue recognition

                        For both FSL and PST, charter income receivable under operating leases is recognised in the
                        income statement on a straight-line basis over the period of the respective term leases.

                        For Rickmers, revenue arises from time charter, which is of operating lease in nature, on a straight-
                        line basis over the period of the time charter contracts. Any losses arising from time charters are
                        provided for in full as soon as they are anticipated.


                        Depreciation policies vary among the three trusts, though depreciation method is similar.
                        Depreciation of the cost of the vessel (less its residual value) is recognised in the income
                        statement on a straight-line basis over the remaining useful lives of the vessel. Apart from PST,
                        which has the most aggressive depreciation policy by assuming zero residual value, both FSL and
                        Rickmers review the depreciation at each reporting date.

                        It is to note that depreciation will not affect any forecast and projected DPU because the amount is
                        non-tax deductible and is added back in arriving at the trusts’ distributable income.

                        Management Fees

                        The structure of both FSLT and PST is 4% of charter income, payable on a quarterly basis.
                        Rickmers is entitled to Management Fees comprising of a fixed component of US$1.6m/year plus a
                        variable portion that is equal to 0.9% of annual net charter income. Thereafter Dec 09, the fixed
                        component of US$1.6m will be increased by 3% annually.

                        Finance Cost

                        Finance cost is dependent on the credit facilities that each trust undertakes.

                        FSL has drawn down the entire US$250m seven year revolving loan facility agreement with Bank
                        of Tokyo-Mitsubishi UFJ Ltd and Bayerische Hypo- und Vereinsbank AG. The credit facility
                        requires payments of interest quarterly on the drawn amount of the facility, at a rate of 1.0% per
                        annum above the 3-month LIBOR. In addition, FSLT has fully used the US$200m four year
                        revolving credit facility at interest payments of 1.2% above the 3-month LIBOR in the purchases of
                        the two Geden crude oil tankers and two Yang Ming containerships. FSLT is currently arranging
                        financing for the YM Enhancer (3 Yang Ming containership).

                        PST has drawn down three 12-year term loan facilities from three banks, namely DBS Bank, HSH
                        and OCBC, RCF from DBS, as well as a ten year term loan facility extended by DnB.

                        Rickmers entered into a US$360m credit facility during IPO, of which US$331m was drawn down
                        to finance the purchase of the vessels. In 2Q08, Rickmers entered into 13 conditional memoranda
                        of agreement to acquire 13 newbuildings. Rickmers has obtained signed term sheet for debt
                        financing of up to US$627.5m to partially fund this newly proposed acquisition.

                                                                                                         DMG Research
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                                              See important disclosures at the end of this publication
                      APPENDIX 2: MORE ABOUT DPU

                        DPU Sustainability

                        •    As long as the lease returns exceeds the cost of debt (Interest Rate on Lease x assets –
                             Interest Rate on Debt x debt) by sufficient margin, shipping trusts can remain profitable.

                        •    Leases are locked-in for long term charter contracts, thus providing income stability to

                        •    FSL, for example, adopts distribution thresholds and subordination in which the sponsor
                             guarantees a minimum DPU and tops up this DPU in the event that actual DPU falls short of
                             this subordination threshold.

                        Calculation of DPU

                        DPU = [Revenue from lease – Interest Cost - All Management, trust fees & other trust expenses +
                        Depreciation & Ammortisation] / No. of units

                        Accretive Acquisitions

                        Accretive acquisitions are acquisitions that will increase the distributable cash flow per unit.

                                                                                                           DMG Research
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                                              See important disclosures at the end of this publication
DMG & Partners Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated: Stock is not within regular research coverage

This research is for general distribution. It does not have any regard to the specific investment objectives, financial situation and particular needs of
any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser
before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report.

The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor
accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to
change without notice.

This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities, DMGAPS and its affiliates, their
directors, connected person and employees may from time to time have interest and/or underwriting commitment in the securities mentioned in this

DMG & Partners Securities Pte Ltd is a participant in the SGX-MAS Research Incentive Scheme and receives a compensation of S$7,500 per stock
per annum covered under the Scheme.

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                                                   See important disclosures at the end of this publication

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