A business trust is a structure that is setup to provide a steady stream of dividend payout from the operating business or assets. The yield can sometimes be as high as 10+% (Business Times had previously published an article highlighting the key differences between a REIT and business trust).

The high yield can be enticing for newbie investors, and they sometimes neglect to consider the fundamentals.

Because distributions are paid purely from cashflows (rather than earnings), the trust can pay a higher dividend without factoring in non-cash items like depreciation.

It is important to look beyond the yield and see whether the underlying assets are able to sustain the payout in the long run. Indeed, for a few business trusts, they had to resort to a rights issue to raise capital a few years after listing.

Many investors found out that despite the dividends they had received, they had suffered huge losses as a result of a significant drop in price.

Some examples: (IPO price, last Friday’s closing price)

Cityspring : $0.69, $0.39 (rights issue done twice!)

Hutchison Port : US$1.01, US$0.725

Ascendas India Trust : $1.18, $0.735

Indiabulls : $1, $0.108 (rights issue done once, no distributions given to date!)

First Ship Lease : $1.49, $0.17

Rickmers Maritime : $1.57, $0.315

Some of the business trusts which delivered a position return to shareholders like Hyflux Water Trust and Pacific Shipping Trust are no longer around as they had been delisted.

I have come to a conclusion that for the majority of business trusts, it is better to buy them from the secondary market rather than to get it from the initial public offering (IPO). Of course, that is provided the counter is worth owning in the first place.

Growing Hunger for Business Trust (Sunday Times)

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And analysts are not positive on the outlook of the shipping sector either.

Both NOL and Cosco trade at around $1, with their prices falling more than 50% since the start of the year.

Hutchison Port Holdings Trust, which listed only in March this year, has lost about 40 per cent in stock price since it listed at an offer price of US$1.01. This is a brutal loss for IPO investors in just a short period of time. With a projected DPU of 5.9 cents, the current trading price implies a yield of almost 10%.

Shipping Trusts have not been spared. Rickmers, First Ship Lease (FSL) and Pacific Shipping Trust, trade at around $0.30 (Pacific in US$), with yields ranging from 8% to 16%. All three are trading way below their IPO price, with Rickmers and FSL significantly lower.

When Shipping Trusts were first introduced in SGX a few years ago, they were positioned as defensive yield instruments with stable cash flows as their operating leases were all locked in for the long term. We now know that this is not true as their shipping customers can also default on their lease. Both Rickmers and FSL also unfortunately choose to expand their fleet just before the financial crisis in 2008, which led to them having to do equity fund raising at just about the worst possible time.

I used to own Rickmers (and FSL to a lesser extent) for brief periods of time but have bailed out of them during the 2009 recovery.

With shipping being one of the least favored sectors now, are there brave contrarians investors out there?

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