Keppel Infrastructure Trust - DBS Research 2015-11-13: A potent infrastructure play

Keppel Infrastructure Trust - DBS Research 2015-11-13: A potent infrastructure play KEPPEL INFRA TRUST A7RU.SI 

Keppel Infrastructure Trust - A potent infrastructure play 

  • KIT is well positioned as the premier Singapore infrastructure-focused Business Trust 
  • Very stable cash flows backed by largely availability-based payments 
  • Bigger scale and optimised balance sheet will create more inorganic growth opportunities 
  • Current price offers 7.3% dividend yield; initiate with BUY and TP of S$0.56 

Infrastructure platform with steady cash earnings. 

  • The newly revamped Keppel Infrastructure Trust (KIT) has an asset size of close to S$4bn, with a portfolio well diversified across utility assets like gas, electricity, water and waste management. 
  • 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 creates headroom for growth. 

  • Current gearing levels are not very aggressive, with net debt-to-equity ratio of around 1.0x, and net leverage of around 32% of assets. 
  • Refinancing risks are also limited in the near term as about 90% of total outstanding debt is due only in 2019 and beyond. 
  • While there is no statutory cap on gearing levels, we estimate that the Trust could borrow up to S$1bn for acquisitions before it hits the 45% leverage level. 
  • The right of first refusal option on certain assets provided by Sponsor Keppel Infrastructure to the Trust presents the easy targets in the near to medium term. But management is also constantly evaluating third-party options in sectors like energy, telecoms, water and waste management. 
  • Acquisitions are expected to be the main kicker in the future. 

Initiate with BUY. 

  • Based on our DCF valuation methodology (cost of equity 6.3%), we derive a valuation of S$0.56 for KIT, which implies a dividend yield valuation of 6.7% based on annual distribution forecast of 3.73Scts in FY16/17. 
  • Given the total return potential of 15% (including dividends) at current price, we initiate coverage on the counter with a BUY call.

Suvro SARKAR DBS Vickers | HO Pei Hwa DBS Vickers | http://www.dbsvickers.com/ 2015-11-13
DBS Vickers SGX Stock Analyst Report BUY Initiate BUY 0.56 Same 0.56