Excerpts from analyst's report
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Potential resumption of dividends from strong cashflows. FSL has turned compliant with its VTL loan covenant since end of 4Q14. Due to its strong cashflow generation, the average income available for distribution in the last 4 quarters were sufficient for 0.65 US cents dividends per quarter. As the management prefers to wait to ensure that the distribution is reliable and sustainable if resumed, FSL has meanwhile embarked on share buybacks.
Benefiting from rising shipping rates. With 9 out of 23 vessels exposed to the spot market, FSL benefits from the recent rise in shipping rates. We especially like its presence in the crude oil tanker and product tanker segments where rates have risen above that in 2010. We also like that FSL has already exited from the depressing drybulk market.
Cheap even if we conservatively revalue the book to market. Even if we conservatively revalue FSL’s vessels to market and exclude the contracted revenue, our derived net assets of US$94.3m (S$127.3m) is still above its market cap today. Importantly, management does not think that further impairments are likely in the near-term.
Extremely attractive relative to shipping peers. Our revalued price-to-book ratio of 0.88 is still significantly lower than the peer average of 1.24. If FSL is trading at its peer average, it should rerate to S$0.244, which indicates a potential 41% upside. However, we also note that FSL may take time to rerate as it has yet to resume regular dividends. If the general market continues to trend down, a more market neutral strategy is to switch from Rickmers Maritime (RMT) to FSL.
FSL is no longer in breach of the VTL covenant, may see near-term revenues expand from rising shipping rates and looks cheap even if the book is revalued at market. Comparatively, RMT’s VTL waiver expires end-2015, may see reduced revenue with fixed charters coming off and may undertake further impairments if charter rates were to stay at today’s rate.
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