Keppel Infrastructure Trust (KIT SP) - DBS Research 2017-10-17: Steady Yield Instrument

Keppel Infrastructure Trust (KIT SP) - DBS Vickers 2017-10-17: Steady Yield Instrument KEPPEL INFRA TRUST WEF 2015 A7RU.SI

Keppel Infrastructure Trust (KIT SP) - Steady Yield Instrument

  • DPU maintained at 0.93Scts in 3Q17.
  • Potential M&A will be key catalyst in future.
  • Dividend yield is around 6.8% at current prices.
  • Maintain BUY with Target Price of S$0.60.

What’s New 

3Q17 distribution of 0.93Scts in line. 

  • Keppel Infrastructure Trust (KIT) declared DPU of 0.93Scts for 3QFY17, another steady quarter, as expected. 
  • Group revenue was flat y-o-y and q-o-q at S$160m in 2Q17 but distributable cashflows – the key number for KIT – was up 4% y-o-y and 5% q-o-q to S$40.5m on account of better performance at City Gas. 
  • City Gas’ cash generation tends to fluctuate from quarter to quarter owing to time lag between adjustments of gas tariffs and changes in underlying fuel costs, but smoothens out over time. 
  • Cash flows from other key assets remained stable and the Trust’s newest asset, Data Centre One, contributed higher positive cash flows, as rental rates were renewed in line with existing agreements. 
  • Basslink also generated positive funds from operations for the third successive quarter but the Trust does not use these cash flows for distribution purposes, rather for servicing loans.

Some positive news at Basslink. 

  • While discussions are still ongoing with Hydro Tasmania and the banking syndicate on matters arising from the undersea cable outage that occurred through most of 1H16, Hydro Tasmania has finally resumed the contractual payment of full facility fees to Basslink from September 2017. 
  • To recap, Hydro Tasmania had not paid full facility fees to Basslink from September 2016, but had instead made good faith payments (which were lower) since December 2016. Once Basslink receives full facility fees for 12 months, it will be able to meet the minimum debt service coverage ratio (DSCR) under project financing. 
  • To-date, Basslink remains current on the debt and all outstanding payments under the project financing have been fulfilled. Resumption of facility fees from Hydro Tasmania helps lower the risk of technical debt default situation at Basslink.
  • Do note however that Basslink-related issues have no impact on KIT's distributions as Basslink has not been contributing to distributable cash flows for a while and is not expected to in the near future either.

Lower cost of equity funding should make acquisitions fructify sooner than later.

  • Current gearing levels are not very aggressive for a utility asset owner, with net debt-to-EBITDA ratio of around 5.0x (excluding Basslink). 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 look at acquisition targets in the S$1bn enterprise value range funded by a 2:1 debt: equity mix. The share price re-rating YTD in 2017 should make it easier for the Trust to raise equity at lower cost of capital as and when required. A lower cost of funding will also enable the Trust to bid more aggressively for M&A targets. 
  • Apart from the ROFR pipeline, management continues to evaluate 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 the next 6-12 months. This should be a key catalyst for further re-rating.

Maintain BUY with TP of S$0.60. 

  • Based on our DDM-based valuation methodology (Cost of Equity: 5.5%), we derive a valuation of S$0.60 for KIT. 
  • The Trust is currently trading at a yield of 6.8% based on annual distribution forecast of 3.72Scts in FY17/18. 
  • Given the total return potential of about 16% (including dividends) at current price, we maintain our BUY call on the stock.

Suvro SARKAR DBS Vickers | 2017-10-17
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.600 Same 0.600