FSL Trust: A crisis or an opportunity?

I still have units of FSL Trust which were bought at an average price of S$1.00 per unit.  By any stretch of imagination, I cannot foresee FSL Trust trading at S$1.00 per unit in the next few years, if ever.  I have kept these units in a frozen portfolio together with a few other stocks to remind myself of the mistakes I made.

As FSL Trust enjoyed a recovery in unit price and was trading at an average of 60c for about a year till the first few days of May 2010, reaching a high of 69.5c in July 2009, I advised potential investors that it is still a risky investment. The primary reason why I consider FSL Trust to be a risky investment is its indebtedness.

As of 31 March 2010, it had bank loans of US$484.6m. This has been reduced to US$ 477.1m after another loan payment was made in April 2010. FSL Trust makes quarterly loan payments. About half of the loans will mature in April 2012 and the rest are maturing in March 2014.  Although its vessels are valued at US$826m, it only has US$56m in cash and cash equivalents as of 31 March 2010.

In 1QFY10, FSL Trust's revenue was US$24.43m.  The two ships which were leased to Groda, Verona I and Nika I, contributed 15% to FSL Trust's revenue.  Assuming a total cessation of contribution (which is not very likely), quarterly revenue would decline to US$20.77m. Then, assuming cost of operations remain the same and assuming that US$8m is used to make quarterly loan repayment as usual, what is left would be US$4.77m.  This could then be distributed to unit holders.  This would give a dpu of about 0.8 USc (or 1.08 Sc).

Based on the current unit price of 37c, the yield would be 11.68%.  If the unit price declines to test its historic low of 32c, the yield would be 13.5%.  Remember that this is based on the most abject scenario that contributions from Verona I and Nika I would cease completely.  That is why I said on 9 June: "It seems to me that a test of 32c as support would be overly pessimistic and if it should come to that, I would probably buy in again."

In all probability, FSL Trust would be able to secure the release of the two vessels by paying US$4.8m in total.  It would be able to fund this internally as it has US$56m in cash and cash equivalents. A resumption of operations of the vessels would continue to contribute to revenue although much reduced.

As of 31 March 2010, NAV is 62 USc per unit.  That is about 83.7 Sc (based on US$1 = S$ 1.35).  Buying at 37c represents a 56% discount to NAV while buying at 32c would represent a 62% discount to NAV.  Compared to buying at 60c, which represents a lesser 28.5% discount to NAV, there is a greater margin of safety now.

For sure, FSL Trust's high gearing is still an issue.  However, as its unit price continues declining, risk reward analysis suggests that it might be rewarding to enter with a long position.  I did so but was probably too early as I anticipated a bottoming of the unit price instead of waiting for clearer signs using TA.

Panic is still running high and fear is palpable, judging by the relatively high volume of trade as price declined. I am sure that there is no shortage of short sellers as well (please pardon the pun).  Once short sellers begin to cover their positions and once the last bearish investor throws up his arms in despair, we will see a reversal.  We must see a base forming and it would be ideal to see that base retested and holding.  That is a good time to add to long positions.  In crises, we find opportunities.  This crisis might just be an opportunity.

Related post:
FSL Trust: A new low.