Wednesday, December 16, 2015

Case study of first ship lease trust

(Vested interest)

My interest was aroused when Kyith of investment moats and Nick of valuebuddies talk about this company, and specifically, the turnaround in its fortunes. So decided to do some homework and below is my findings.

First ship problems started when several of their charterers defaulted and they have heavy interest costs that dragged down bottom line

So what has changed? First, killing 2 birds with one stone by selling non-profitable bulk carriers and reducing debts. 

Also, moving away from the business model of financing by doing leaseback in the form of bareboat charters to original owners. Now, vessels are source more actively to charterers. 

Fool highlight 3 risks. So I examined the 3 risks.

First, charterers' balance sheet. None actually have a robust balance sheet if you are talking about debt related ratios.(got to do with the industry) but TORM, James Fisher reported higher profits from their Tankers segment than a year ago. Trafigura is a new charterer for FSL Hamburg and FSL Singapore from Petròleo Brasileiro S.A. Both vessels are docked in Q4, "but is necessary to ensure that the vessels can earn the significantly higher contracted charter rates." A tick in execution.

Looking at their remaining Charterers, Yang Ming has turned profitable in 2014 with positive cash flow.

Next, interest rate hike. This is a valid concern, but they have reduced their debt and their existing debts are amortized over 6-7 years. so I guess that somewhat will offset any hike in interest rate.

The third risk is the most interesting. The operating risk. Those in pool arrangement are reported during quarter reports as a group. Vessels might or might not be chartered out and the rate dependable of market charter rate. Next, those charters with TORM are of floating nature, which means L2 charter rate is also dependable on market.

Of those in pool arrangement, FSL London and FSL Santos are idle.

The spot rates for L2 Tankers in Q4 are weaker than Q3, but still higher than a year ago.

Also FSL Osaka, the newly acquired MR tanker is already deployed. Another tick in execution.

Looking at the average rate for Scoprio Tankers, the rate of $16500 per day quoted by FSL trust do indeed look conservative.

GIven than Iran Crude in coming into market, and US export ban on oil might be lifted, I believed the Macro circumstances are favourable for the tanker markets. And will crude oil at 11 year low and projected to stay low till at least late 2016, I felt the odds are in favor of a good turnaround of a ship.

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