First Ship Lease Trust (FSLT) was queried by the SGX yesterday after its stock price surged about 28% (from 7.9 c to as high as 10.1 c) in the past 3 days. In its response last night, FSLT said KGI Securities had issued a report on the company on 14 Aug 2017, and "save as mentioned above, the Company is not aware of any information not previously announced concerning First Ship Lease Trust, the Company, its subsidiaries or associated companies which, if known, might explain the trading."

Here are excerpts from the KGI Securities' report


Analyst: Joel Ng

294 tankerBargain-basement price; Opportunity to accumulate

Event

FSLT reported a dismal set of 2Q17 results due mainly to US$24m of impairment charge on eight vessels. 2Q17 revenue declined 17% YoY to US$21m due to weaker rates across all its shipping segments. Furthermore, two crude tankers were only partially contributing in the quarter as they were sent for dry-docking

Impact
Despite the loss, Value-to-Loan (VTL) ratio remains >1.4x, a very healthy level 
compared to peers. FSLT continued to generate a healthy US$12m of free cash flow in the quarter.


Valuation & Action

FSLT

Share price: 8 c

Target: 
13.2 c

We recommend a BUY and a target price of S$0.132, which implies a 65% upside. We believe this is the minimum value that FSLT should be trading at.

Our target 
price is based on a conservative estimate of its portfolio of vessels using current market prices (liquidation value if it were to sell all its assets in the market).

We 
also derived a DCF-backed valuation of S$0.18 based on conservative assumptions of 1) 8 years remaining operational life of its vessels - current average fleet age is ~12 years old, and 2) 20% decline in FCF from FY21 to FY25 and 3) a WACC of 11.0%.

Based on our sensitivity analysis, upside can range from 60% to 158% in the next 
few quarters (Figure 2).

JoelNg10.16"Our estimates are conservative compared to FSLT’s Value-to-Loan (VTL) valuation. FSLT had a LTV of 1.4x – 1.8x as at end 2Q17. Based on the minimum VTL of 1.4x, FSLT is worth S$0.206 compared to our conservative estimate of S$0.132.

-- Joel Ng (photo),
Head of Research,
KGI Securities

The short-term catalyst would include the refinancing of its US$181m debt, which is still on hold pending the change of major shareholder.

If the deal 
(convertible loan and equity sale) goes through by end September 2017, it could see Navios Maritime Holdings (NM US) hold at least 50.1% of the fully-diluted units of FSLT.

Risks
Continued decline in charter rates for its key shipping segments – mainly in product and chemical tanker rates. In the event that FSLT is unable to refinance, we believe the best option would be to liquidate the trust and return the funds to unitholders. In this scenario, FSLT should be worth at least S$0.13 based on the current market value of its vessels.

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