Saturday, 20 January 2018

Update on First Ship Lease Trust (FSL)

A few major developments has happened at FSL Trust. Hence, it is time that a review of FSL's performance and financial strength be done to determine if the trust is still a viable investment.

Recent Developments

The recent sale of 3 ships (FSL Tokyo, FSL Santos & FSL Santos) was a major development. FSL is estimated to receive a cash proceed of 26 mil which will be used to lower their debts to 132 mil. Based on the past three quarters of financial results, the 3 ships have produced for the trust about US$2.2 mil in BBCE. Annualising it, it means FSL was selling an asset that was yielding about 10% in cash yield. The three ships contribute about 6.7% of FSL's revenue.

Given how hard FSL is trying to refinance its current debt facility, I feel it is a compromise FSL has to take. After all, the 3 ships are likely to have only about 9 years in service left before they have to be scrapped.


A major concern for shareholders now is that FSL is in the process of obtaining the renewal for its debt facility. Not all bankers being in favor of a renewal. This has resulted in the refinancing moving on to a scheme of arrangement of stage which involves a court meeting. It remains to be seen if the banks will agree to an eventual renewal of debt facility. In my view, the recent 3 disposals of ships is likely to make renewal of the debt facility easier to achieve.

Evaluation of FSL

It is important to see how much is FSL worth now in the current Tanker climate. In this part, I will be evaluating on an asset based level and on a cash flow.

Asset basis

KGI securitites did an estimation of the second hand market value of FSL's assets by a ship by ship breakdown, Based on the past three transactions, KGI's valuation of the ship has been below the price which FSL has sold. This means KGI's estimation are conservative and perhaps is a good benchmark to evaluate. 

Based on KGI's, the remaining ships are deemed to be worth US$199 million. Netting off FSL's debt of US$132 million, interest accumulation of US$5 million and estimated disposal fee of US$6 million, shareholders are likely to get back US$56 million for the ships. And with US$16 million in cash holdings, the current value of FSL is US $72 million or 14.9 cents per share.

Cashflow basis

From the past 3 quarters of financial results, FSL has generated US$32.6mil in BBCE revenue. BBCE is the revenue that goes to FSL after netting off all relevant cost. Taking into consideration the loss of US $2.2 mil BBCE from the disposal of 3 ships and a 10% discount on future BBCE revenue due to ageing ships etc, FSL's BBCE generation ability is US$37 million per year until 2021.

After 2021, the lucrative US$20mil in BBCE from the Yangming contracts will expire and this means, the 3 containerships' BBCE revenue is likely to be about US $4mil per year. Hence from 2021 and possibly to 2026, BBCE for FSL is US$21 million per year.

At a debt level of US$132 mil and constant repayment of US$44 mil per year based on existing cash holdings and BBCE generation until 2021, it will take FSL until 2022 to repay all debts. From 2022 to 2026, the cashflow generated as well as the scrap value of the ships will be for shareholders. Based on current scrap metal prices, the ships are worth about US$65 million. This means shareholders will receive a total cashflow of about US$170 million, or about 26 cents per share.

Discounting it to present value at a 10% discount rate, the current value of FSL is coincidentally about US $72million or 14.9 cents per share.

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