Keppel Infrastructure Trust - Steady DPU track record maintained
- 4Q16 DPU of 0.93Scts in line with estimates.
- All assets fulfilling contractual obligations.
- With Basslink issues settling down, management focus should shift towards acquisitions.
Infrastructure platform with steady cash earnings.
- Keppel Infrastructure Trust (KIT) maintained its record of steady DPU of 0.93Scts in 4Q16, as expected.
- KIT generated distributable cash flow of S$149.5m in 2016, and will be paying out S$143.5m in distributions to unitholders.
- 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. We look forward to the Trust kicking off its M&A ambitions in FY17.
- 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 7.5% based on annual distribution forecast of 3.72Scts in FY16/17.
- Given the total return potential of about 20% (including dividends) at current price, we maintain our BUY call.
Key Risks to Our View
- Key risks include
- plants not meeting availability thresholds owing to operating issues,
- increasing debt refinancing risks for the asset portfolio as the assets age, and
- exposure to increases in inflation and interest rates.