Keppel Infrastructure Trust - DBS Research 2016-10-18: Marching on with stable DPUs

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KEPPEL INFRA TRUST WEF 2015 A7RU.SI

Keppel Infrastructure Trust - Marching on with stable DPUs

• 3Q16 DPU of 0.93Scts in line with estimates.
• All assets fulfill contractual obligations.
• Basslink back in operation but issues linger with offtaker and lenders.

Infrastructure platform with steady cash earnings. 

• Over the last three quarters, Keppel Infrastructure Trust (KIT) has maintained a steady DPU of 0.93Scts. 
• 9M-FY16 distributable cash flow of S$117.5m represents 109% of distributions announced YTD in 2016, thus ensuring there is enough buffer. 
• Most of the assets derive revenue from availability-based payments, independent of actual offtake. Hence, cash flows are highly predictable and not exposed to economic cycles. 
• Concession agreements are long term in nature, of up to 20 years, and mostly with government entities, thereby minimising risk.

Scale and balance sheet create headroom for growth. 

• Current gearing levels are not very aggressive for a utility asset owner, with net debt-to-equity ratio of around 1.2x, and net leverage of around 37% of assets. 
• Refinancing risks are also limited in the near term as close to 100% of loans are due only in 2019 and beyond. 
• While there is no statutory cap on gearing levels, we estimate that the Trust could borrow close to S$500m for acquisitions before it hits the 45% leverage level. 
• The right of first refusal (ROFR) option provided by Sponsor Keppel Infrastructure to the Trust offers easy targets in the near to medium term. But management is also continuously evaluating third party options in sectors like energy, telecoms, water and waste management. Acquisitions are expected to be the main kicker in the future.

Valuation

• Based on our DCF valuation methodology (cost of equity 6.3%), we derive a valuation of S$0.56 for KIT. 
• The Trust is currently trading at an attractive dividend yield of 7.4% based on annual distribution forecast of 3.73Scts in FY16/17. 
• Given the total return potential of about 18% (including dividends) at current price, we maintain our BUY call.

Key Risks to Our View

• Key risks include 
  1. plants not meeting availability thresholds owing to operating issues, 
  2. increasing debt refinancing risks for the asset portfolio as the assets age, and 
  3. exposure to increases in inflation and interest rates.

Suvro SARKAR DBS Vickers | Pei Hwa HO DBS Vickers | http://www.dbsvickers.com/ 2016-10-18

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.56 Same 0.560