KEPPEL INFRA TRUST WEF 2015
Keppel Infrastructure Trust
A7RU.SI
KEPPEL INFRASTRUCTURE TRUST (KIT SP) - Through the Looking Glass
- Keppel Infrastructure Trust (KIT) is the largest infrastructure trust in Singapore, with over S$4b in assets under management. The trust’s portfolio consists of the combined portfolios of Crystal Trust (formerly known as Keppel Infrastructure Trust) and CitySpring Infrastructure Trust (CIT), comprising eight infrastructure assets in Singapore and Australia that generate long-term, stable cash flows, backed by creditworthy or reputable off-takers.
INITIATE COVERAGE
- Initiate coverage with HOLD and target price of S$0.56, employing the DCF method and 6.7% cost of equity. Recommended entry price is S$0.48. Our DCF is based on the estimated cash flows that KIT will receive over the lifespan of its existing contracts, and terminal value based solely on City Gas’ cash contributions. We base our terminal value solely on City Gas as it is the only asset within KIT’s portfolio with a recurring income stream.
- Defensive stock with implied distribution yield of 7.0%. KIT intends to distribute 3.73 S cents p.a., implying a distribution yield of 7.0%. KIT’s assets are based in the defensive utilities and datacentre businesses, which are minimally impacted by economic cycles. Based on our estimates, 75% of KIT’s annual cash flow is derived from guaranteed agreements with statutory boards or contractual agreements with third parties, providing cash flow visibility. The distribution of 3.73 S cents is highly sustainable over 2015-25, equivalent to about 90% of distributable cash flow p.a.
- Implied distribution yield of 7.0% is 0.7ppt below peers’. Assuming KIT pays out its target distribution of 3.73 S cents p.a., its implied distribution yield is 7.0%. This is 0.7ppt lower than the average dividend yield of 7.7% for yield stocks in the Singapore universe. The difference widens to 1.8ppt when compared against immediate peers’ yields in the Infrastructure space, which average 8.8% (KIT excluded).
- Ample debt headroom of S$448m for future acquisitions. Net gearing (net debt over total assets) is estimated at 0.35x for 2015. KIT has an additional S$448m of debt headroom at a gearing level of 0.45x, which provides ample space for acquisitions. KIT can leverage up if necessary as it is not constrained by the regulatory gearing limit of 0.45x for REITs. The flexibility allows KIT to quickly respond to new acquisitions, which will eventually be funded via new unit issues.
INVESTMENT HIGHLIGHTS
- Initiate coverage with HOLD and target price of S$0.56, employing the DCF method and 6.7% cost of equity. Recommended entry price is S$0.48. Our DCF is based on the estimated cash flows that KIT will receive over the lifespan of its existing contracts, and terminal value based solely on City Gas’ cash contributions. We base our terminal value solely on City Gas as it is the only asset in KIT’s portfolio with a recurring income stream.
- Defensive stock with implied distribution yield of 7.0%. KIT intends to distribute 3.73 S cents p.a., implying a distribution yield of 7.0%. KIT’s assets are based in the defensive utilities and datacentre businesses, which are minimally impacted by economic cycles. Based on our estimates, 75% of KIT’s annual cash flow is derived from guaranteed agreements with statutory boards or contractual agreements with third parties, providing cash flow visibility. The distribution of 3.73 S cents is highly sustainable over 2015-25, equivalent to about 90% of distributable cash flow p.a.
- Implied distribution yield of 7.0% is 0.7ppt below peers’. Assuming KIT pays out its target distribution of 3.73 S cents each year, its implied distribution yield is 7.0%. This is 0.7ppt lower than the average dividend yield of 7.7% for yield stocks in the Singapore universe. The difference widens to 1.8ppt when compared against immediate peers’ yields in the Infrastructure space, which average 8.8% (KIT excluded).
- Effective distribution yield of 4.6%. Based on its cash flow profile, we estimate a compounded annual decline of 2.4% in KIT’s valuation. This implies an effective distribution yield of only 4.6% (implied distribution yield less annual decline). The decline is due to the expiry of cash flow contributions from concessions/agreements, and assumes KIT neither acquires new assets nor is able to renew the contracts. In a sense, the higher yield serves as compensation to investors for the eventual decline in capital value.
- Net asset value to decline 15% alone on concessions. KIT’s concession assets are amortising assets, hence the carrying value for these assets declines every year. Concessions account for 15% of total assets, and are expected to decline to zero by 2035 ceteris paribus. As total liabilities is expected to remain relatively constant throughout the period, the decline in total assets base results in an NAV decline. This decline is reflected by the higher required distribution yield.
- Ample debt headroom of S$448m for future acquisitions. Net gearing (net debt over total assets) is estimated at 0.35x for 2015. KIT has an additional S$448m of debt headroom at a gearing level of 0.45x, which provides ample space for acquisitions. KIT can leverage up if necessary as it is not constrained by the regulatory gearing limit of 0.45x for REITs. The flexibility allows KIT to quickly respond to new acquisitions, which will eventually be funded via new unit issues.
- Repayment of loans would entail a lower effective yield of 2.7%. KIT is able to sustain its higher 3.73 S cent payout through continued refinancing of S$1b in debt. In the scenario where KIT repays its debt on a straight-line basis over the assets’ lifespan, we estimate a distribution of 2.50 S cents per share as the sustainable payout for the period 2015-24. This translates to an effective yield of 2.7% at current share price of S$0.53. Consequently, the change in cash flow lowers our valuation of KIT to S$0.44. Our sustainable payout estimate represents the level which requires no additional debt financing to meet cash obligations, and assumes refinancing of the outstanding balances at maturity.
- Gradual transformation to a recurring earnings business through M&As. The acquisition of CIT and Keppel Merlimau Cogen (KMC) has reduced concessions as a percentage of total assets from 85% to 15%. This lowers the NAV’s rate of depreciation, and continued acquisition of non-concession based assets is likely to improve the asset profile. Assets considered by KIT for acquisition encompass businesses with recurring income as well as concession-based ones. We believe there will be less focus on concession-based assets to address the depreciating NAV over the long run.
VALUATION
- Initiate coverage with HOLD and target price of S$0.56, employing the DCF method and 6.7% cost of equity. Recommended entry price is S$0.48. Our DCF is based on the estimated cash flows that KIT will receive over the lifespan of its existing contracts, and terminal value based solely on City Gas’ cash contributions. We base our terminal value solely on City Gas as it is the only asset within KIT’s portfolio with a recurring income stream.
- Implied distribution yield of 7.0% is 0.7ppt below peers’. Assuming KIT pays out its target distribution of 3.73 S cents p.a., its implied distribution yield is 7.0%. This is 0.7ppt lower than the average dividend yield of 7.7% for yield stocks in the Singapore universe. The difference widens to 1.8ppt when compared against immediate peers’ yields in the Infrastructure space, which average 8.8% (KIT excluded). We note that the majority of KIT’s portfolio comprises assets in Singapore, which are of comparatively lower risk.
- Effective distribution yield of 4.6%. Based on its cash flow profile, we estimate a compounded annual decline of 2.4% in KIT’s valuation p.a. This implies an effective distribution yield of only 4.6% (implied distribution yield less annual decline). The decline is due to the expiry of cash flow contributions from concessions/agreements, and assumes KIT neither acquires new assets nor is able to renew the contracts. In a sense, the higher yield serves as compensation to investors for the eventual decline in capital value.
Foo Zhiwei
UOB Kay Hian
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http://research.uobkayhian.com/
2015-09-25
UOB Kay Hian
Analyst Report
0.56
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