The event was one of the many conducted in the Asian Investment 2009 in Suntec. Below I try to capture some of my observations and important points, by no means a comprehensive one. Please do you own research before any investment decision.
It started with individual talks by OCBC analyst Meenal Kumar, FSL CFO Cheong Chee Tham, PST CEO ALvin Cheng Yu-Dong, Rickmers CEO Thomas Preben Hansen, and finally a panel discussion.
Meenal basically presented some basics of what a shipping trust is. I am not very sure of the objective of her presentations. But certainly she did not use the opportunity to sharpen investors' ability to understand the business model, she also did not even attempt to question any of the 3 companies directly. I hope one day we can see analyst really playing their part.
Next come FSL CFO, Cheong Chee Tham. Nothing surprise or exciting, he kept highlighting that FSL is more like a bank specialized in shipping than a shipping operator, as they only involve in bare boat leasing. And very importantly, they have a Chief Risk Officer to assess customer (counter party risk).
The next presenter was PST CEO Alvin Cheng. He started with history, saying that the company is the first listed shipping trust, in May 2006, and other aspects of the company. He appears cool and calm, really the trusted CEO type. However, he made 2 statements that gave me some uneasiness. First, he mentioned that the management fee is 4% of revenue, and therefore the management interest is aligned to that of unitholders to grow revenue. However, revenue can grow in many ways, and may not necessary benefit unitholders, eg right issue for acquisition. While I believe Alvin has no intention to sacrifice unitholders' benefit, this type of sweeping statement somehow made me feel my IQ is insulted. Second issue I have is on his illustration of PST asset value. First he talked about BV at $0.38, conservative value at $0.26, and then 'value in use' (which he said is a cashflow model) at $0.54, from which he concluded the stock is undervalue. My point is this, if this is a cashflow model, then the discount rate would be determined by the market, and reflected by stock price. You can't fix your own discount rate and claim market undervalue it. Other than the 2 points, I think Alvin gave a good presentation, especially on PST effort to continuosly deleveraging, and that the company loan has no asset covenant.
Finally, we have Rickmers CEO Thomas. First thing that caught my mind was the difference in management fee structure. For base fee, it has a fix $1.6 million plus a variable of 0.9% of the revenue. No incentive for acquisition or disposal. Sounds good to me. Again Thomas concurred that counter party risk is the major risk in shipping trust, and Rickmers managed that with choosing on large and financially sound customers. He mentioned that even under current financial turmoil, none of the 3 shipping trusts have been affected in terms of revenue as of now, and this is certainly a big plus compared to REITs. I think yes, but does it mean that the market is inefficient? When the market cannot adjust freely, a collapse could be inavoidable. Well I certainly hope no. On bare boat vs time charter, Thomas insisted that time charter, which means having their own crew on the ships make sense to Rickmers. He recognized an operating cost is incurred (which is small compared to revenue), but that gave him the assurance that the assets are well taken care of. Thomas further touched on the upcoming challenges including the pending $800 million capex requirement, and loan repayment next year, which Rickmers is still exploring many options. While no solution is given, he is certainly giving a lot of transparency, which I think is a good strategy.
Roger (SIAS), Meenal (OCBC research), Thomas (Rickmers), Chee Tham (FSL), Alvin Cheng (PST)
Okay, finally the panel discussion. The moderator Roger Tan from SIAS told the panel that, in order to encourage his wife to invest rather than to spend last year, he promised his wife to cover any loss if any. And expectedly they ended up in shipping trust. What could the panel offers? Well think longterm, look at the business model, look at the cashflow! Will globalization end? Will world trade end?
Next, a question from the audience thrown to Rickmers: What if there is no success in the $800 million capex financing or Maersk just don't want it? Thomas appears confident, firstly there is no way out for Maersk, secondly he knows that Maersk needs the ships badly to be compettive as the big new ships are more efficient. And even in the worst case when everything else fails, Rickmers last option would be not to take delivery. while there is contractual obligation, probably the impact is less than $800 million.
Second question addressed to PST, why not quoted stock in SGD? Well simple, the company asset and liability, revenue and expense, are all in USD. And many investors are USD based. Thomas made a good point when he suggested PST to keep it that way (Rickmers stock quoted in SGD), as he sees the industry will grow in Singapore, and differentiation in the different companies will offer investors choices that fit their needs best.
Finally, time's up, last question. Will the loan to acquire a ship fully paid by the time the first lease end. I think the question makes no sense. If the sum of the first lease is sufficient to fully pay off the loan, in other words the customers comitted a sum greater or equal to the price of a ship, why should the customers lease, they would just buy! To my surprise, PST says some of their ships met this criteria. Those are their IPO fleet, which understandably taking a lower loan. Rickmers and FSL just say said no.
Hope this summary helps for those did not attend.
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