Keppel Infrastructure Trust - DBS Research 2017-04-18: Steady DPU To Start The Year Off

Keppel Infrastructure Trust - DBS Vickers 2017-04-18: Steady DPU to start the year off KEPPEL INFRA TRUST WEF 2015 A7RU.SI

Keppel Infrastructure Trust - Steady DPU to start the year off

  • 1Q17 DPU of 0.93Scts in line with estimates.
  • CityNet to be replaced as Trustee-Manager.
  • Management will need to deliver on acquisitions in 2017.



1Q17 results highlights 


Distribution of 0.93Scts in line but distributable cash income slightly lower than expected in 1Q17. 

  • Keppel Infrastructure Trust (KIT) declared DPU of 0.93Scts for 1QFY17, in line with previous quarters. 
  • Group revenue was up by 2% q-o-q to S$155m in 1Q17 and distributable cashflows – the key number for KIT – came in at S$34.2m, better than 4Q16 cash flows but down 16% as compared to 1Q16 levels. This was largely due to the time lag in adjustment of gas tariffs with underlying fuel costs at City Gas amid a rising oil price environment last quarter. This is likely to smoothen out over time. 
  • The Trust also incurred some one-off abortive expenses in relation to an attempted acquisition in 1Q17, which affected the cash flows to an extent.
  • Cash flows from other key assets remained stable and the Trust’s newest asset, Data Centre One, contributed to positive cash flows. Basslink also generated positive funds from operations but the Trust does not use these cash flows for distribution purposes.

Some Basslink issues still unresolved. 

  • The Basslink interconnector in Australia has returned to service since 13 June 2016, and while Basslink maintains that the preceding outage is a force majuere event, customer Hydro Tasmania has yet to agree. Thus, payments from Hydro Tasmania have not regularised yet. 
  • Ongoing discussions with lenders to restructure the project financing and with insurer on remaining claims have not progressed much either since the last quarter.

CityNet trustee management fees will cease from 2Q17.

  • CityNet receives an annual management fee of around S$4m from its appointment as trustee-manager of NetLink Trust.
  • This will cease from 2Q17 as it has received notice from Singtel of its intention to replace CityNet as the trusteemanager in early 2017. This is largely expected, and should not have a material impact on the Trust’s financials. The effective date of cessation as trustee-manager is 13 April 2017.

Needs to deliver on acquisitions. 

  • While management focus in FY16 was largely on fighting fires at Basslink, an asset that does not contribute to distributions, we believe the saga should be coming to an end and delivering on acquisitions will be the key focus for management in FY17.


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 a yield of 7.0% based on annual distribution forecast of 3.72Scts in FY17/18. 
  • Given the total return potential of about 13% (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 | http://www.dbsvickers.com/ 2017-04-18
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.560 Same 0.560



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