Brokers' Take

Shipping trustsOCBC INVESTMENT RESEARCH, March 26

THE container shipping industry faces a major supply-demand imbalance. According to AXS Alphaliner, outstanding orders for new ships account for about 47.6 per cent of the existing fleet. This translates to a 12.9 per cent per annum growth in the world fleet over the next three years.
With the global recession dampening demand, especially the US consumption story, we expect tough times ahead for the container industry.

Major operators, including shipping trust customers, have announced lay ups, vessel re-deliveries, and plans to attempt to delay order deliveries. About 1.1 million TEUs (twenty-foot equivalent units), or 8 per cent of the world's total container fleet, is currently idle. This broader reality can have a major impact on the trusts' cash flows - and consequently, on distributions to unitholders.

Charterer performance will be key in the coming months - if economic conditions continue to deteriorate, we could see charterers approaching the trust to renegotiate leases.

US-listed comparable, Danaos Corp (not rated), announced that it was suspending dividend payments to divert cash towards funding its new-building programme. It also delayed some deliveries. Back in Singapore, Rickmers Maritime (RMT) is contracted to acquire US$988 million worth of containerships over the next two years, with partial debt funding currently in place.
The manager has so far only said that it 'is exploring all options' to finance its order book, but this is not enough. The market needs more clarity on what RMT will do and whether it will (or can) follow the Danaos route of delaying deliveries or cutting dividends.

Unlike RMT, First Ship Lease Trust (FSLT) and Pacific Shipping Trust (PST) have no committed orders. Meanwhile, FSLT will retain about 20-25 per cent of cash income in Q1 2009 (versus a 100 per cent distribution payout previously) to prepay debt as a pre-emptive 'good faith' gesture to lenders eyeing debt covenants.

We believe that there is room for FSLT to lower payout further to a point where both unitholders and lenders are satisfied. In comparison, PST is only paying out about 50 per cent of cash income. An explicit debt repayment plan would also demonstrate FSLT's commitment to sustainability, in our view.

Still 'neutral' on the sector. While the Straits Times Index is down 4 per cent year-to-date, Singapore-listed shipping trusts are down 10 per cent for the year.

On average, the sector is trading at a 66 per cent discount to net asset value (NAV), but we are not quite ready to call this a 'value' opportunity. In our opinion, a re-rating of the sector depends on signs of an improving external environment and the trusts taking more aggressive action to remedy some fundamental concerns.Sector - NEUTRAL

S-shares agriculture sectorDMG & PARTNERS SECURITIES, March 26

FOR the first time since December 2002, China's consumer price index (CPI) slipped into negative.

China's inflation rate was at its 12-year peak of 8.7 per cent y-o-y in February 2008 due to shortages of grain and pork. But China's CPI fell 1.6 per cent y-o-y last month (food prices fell 1.9 per cent y-o-y). Grain prices rose 4.4 per cent y-o-y last month. We believe that this is due to the drought that hit China during Q1 2009.

We believe that if the current deflation in food prices continues in 2009, this will affect China's agriculture sector negatively, namely China Fishery and China XLX Fertiliser.
China Fishery
Aquatic product prices rose 3.3 per cent y-o-y in February, slower than January's 11.6 per cent rise. We believe that fish prices will remain stable in China due to continued demand. Alaskan pollock is the most common type of fish used in fast-food restaurants and as the global economy continues to worsen, we could see more people switching their diets to Alaskan pollock from other more expensive fishes.

We believe that China Fishery's FY2009 revenue will grow by 3 per cent to US$340 million from fishing. Management forecasts a total of 200,000 tonnes/annum of fish to be caught in FY2009 with an average selling price (ASP) of US$1,700/tonne.

Maintain 'buy' for China Fishery with a price target of $0.86 based on 3.9x FY2009 price earnings ratio.

China XLX Fertiliser

Prices for grain rose 4.4 per cent y-o-y in February and 3.9 per cent y-o-y in January. We believe that higher prices for grain were due to speculation of China's drought situation.

Management has indicated to us that the drought in Henan was not as bad as reports indicated and urea ASP remained constant at an average of 1,950 yuan/tonne (S$430/tonne) year-to-date.

If food prices continue to deflate in FY2009, this could negatively affect China XLX, because farmers will not purchase fertiliser due to cheaper food.

Currently, we are monitoring China XLX's urea and compound fertiliser sales. We are concerned that there may be an oversupply situation of fertiliser in China due to more capacity coming on stream. On the other hand, we believe that the government's 12.3 billion yuan expenditure in the agriculture sector is a tremendous step going forward.

We are currently reviewing our earnings for China XLX as we reassess its compound fertiliser profitability in FY2009.Sector - OVERWEIGHT