First Ship Lease Trust (FSL) – Q3 Earnings


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FSL has released its Q3 results. All in all, the trust has survived the threats from banks. However from its recent Q3 results, it seems there has been some damage to the company.

Higher Financing Cost

Reading its latest Q3 reports, it seems the new bank loans have a higher margin than the old loans interest of (2.8%+ LIBOR). The new loan arraignments have a weighted average of (4.012% + LIBOR). This means as of now the loan’s interest rates are about 6.55%. This is quite high and will definitely affect my previous valuation of FSL.

Coupled with the refinanced 7% convertible loan, it is undeniable financing cost has risen. In my view with the Fed still likely to raise interest, I may have to assume that FSL will have to pay about 7.5-8% for its loan refinancing. After all most of its loans are floating rates.

Also based on its cashflow, it seems FSL is paying down on only the interest as opposed to the previous loan pay down which was amortized.

Cashflow

On the cash flow front, TORM’s revenue loss affected as usual. The company is likely to be only able to churn US$37 million in cashflow until 2020. Thereafter, this amount is likely to drop to US $20 million with the loss of the lucrative US$ 20 million evergreen charter.

Valuation

Using a simple cash flow projection, my previous estimate of being able to pay down its loan by 2022 has been pushed back to 2024. This is because of the higher interest cost as well as the fact it has changed from an amortizing loan to that of interest only. This will definitely strain FSL’s valuation despite making it easier to run on a cashflow basis.

There may be a chance of dividend resumption though because FSL’s cashflow is now on a much better standing.

Based on the cashflow projection, scrap value of US$40 million and 8% discount rate, FSL’s fair value is now 10.1 SG cents. There is still an upside from its recent price of 7.3 SG cents

  
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