Divestment- First Ship Lease Trust
In Nov 2018, FSL announced plans to issue a non renounceable equity raising by issuing new shares at a ratio of 3 new shares for every 2 shares at a price of $0.045. The price of the new shares was at a massive discount to FSL’s reported book value of $0.37 as well as the company’s fair value of about $0.10 based on the current fleet’s value. The issue price is deeply discounted. What is perhaps even more shocking is that is the “non renounceable” nature of this action.
A “non-renounceable” offering means that shareholders are not allowed to sell their rights off on the SGX. Shareholders have to subscribe with their own money or risk getting diluted. This prevents them from not being able to monetise the options should they decide not to subscribe. Seen in this light, my gut feel is that the management felt that it was difficult to raise money from other sources for its fleet renewal and hence, unitholders are forced to subscribe with their money or be heavily diluted.
Fortunately for me, I have started to divest my stake in FSL sometime back in Oct 2018, however I am still holding a significant stake in FSL. The reason for my divestment pre these corporate action is because better companies have pop out and I have re allocated my portfolio. I will be continuing to divest FSL, probably until my stake is in the low number such that I can subscribe to the offering without holding too much FSL shares in the end state. Furthermore the purchase of 2 more tankers will only boost the Assets under management for FSL and increase the management fees the trustee owner will get; I am not sure if purchasing new tankers with an overly dilutive offering will be beneficial to current unitholders.
Addition- Ezion Holdings.
What has been my biggest and highest addition is Ezion Holdings. It is more towards a gamble because I am speculating that liftboat charter rates will improve from its US$29,000 daily rate to that of about US$50,000 daily rate.
Based on a back of the envelope calculations, I foresee that Ezion should be able to charter 12 out of its 14 Liftboat fleet at about US$45,000 daily rate next year. With a cost structure of $46 million per quarter (which includes interest), based on its recent quarterly reports; the company should be able to breakeven in 2019. Current lift boat charterer rates are about US$35,000.
I am basing that eventual state of US$50,000 daily rate will help the company turnaround and this will improve its valuation. However, I too hope that the company will not indulge in too fast an expansion given how debt laden it is now and hopefully it has learn the lessons of the past which brought it to where it is now- too much debts and faced by an industry downcycle.
I bought this stock after the ex dividend of its recent corporate action. The rationale for the purchase of the company is because of my expectation that the new annual 1.2 cents Dividend is sustainable, as of now.
From its quarterly cash flow, the amount of cash APTT generates after netting off CAPEX and interest expense is approximately 38 million to 40 million annually. This translates to 2.5 cents to 2.75 cents in cashflow generated per share. At a dividend of 1.2 cents, the dividends outflow is only 50% of the current free cash produced.
The company currently produces about 190 million in operating cashflow. Hence this means that if business is to decline by about 10%. APTT dividends to cash flow ratio will hit 100%. Factoring this into consideration and the apparent fact that APTT’s business has deteriorated by about 6% last year; it shows that the current dividend may only be sustainable for approximately 2 years. However, at its current price of 12.5 cents, I feel there is a slight margin of safety at 9.5%. And I do not think the decline in ARPU for APTT will be as drastic as its previous 2 years. Of course should APTT share prices move up to the region of 14 to 15 cents range, I feel APTT will be fully valued at an 8% yield, considering the industry challenges in Taiwan as well as high debt load
So that’s all I have to update- a Happy New Year of 2019 to readers!
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