Leverage: Debt to Equity Ratio 116%
With the rather surprising acquisition of 3x containerships from Yang Ming Marine, FSL has exceeded its current credit facility of US$450 million, increasing its debt to equity ratio from 36% before to 116%, more than its leverage policy of 1:1. The 3rd ship due end October is still awaiting financing. In this case, the danger is that FSL might raise equity to leverage on more debt sooner than the expected date of 2009. This will cause a dilutionary effect on shareholder’s equity. However, FSL might instead take on more debt as a 1:1 ratio is considered a lower leverage band compared to its shipping trust competitors, ie PST with its d/e of 2:1. Will continue to monitor the financing situation.
On the DPU side, the 2 containerships will add US0.02c to Q2 and US0.18c to Q3. Including the 3rd ship, Q3 DPU can be expected to grow by US0.27c, bring the DPU per quarter to US3.14c, and for the year USD12.56c. Assuming exchange rate of US$1 = S$1.33, annual DPU = 16.7c, which at the current price of S$1.15 translate to a yield of 14.5%. Looks sweet.
However, if there is little capital appreciation in the unit price(as it looks to be), the management may have to take on more debt at increasing interest expense, instead of raising equity. Yet the equity issue looks inevitable given management’s aggressive acquisition spree.
Wisdom Investments 