Keppel Infrastructure Trust - DBS Research 2018-01-23: Another Steady Year

KEPPEL INFRA TRUST WEF 2015 A7RU.SI

Keppel Infrastructure Trust - Another Steady Year

Keppel Infrastructure Trust (KIT) maintained its record of steady DPU of 0.93Scts in 4Q17, as expected.
KIT generated distributable cash flow of S$30.8m in 4Q17, slightly lower than expected due to a time lag between tariff adjustments and costs at City Gas and one-off maintenance costs at the Ulu Pandan plant. Most of KIT’s 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.

We believe current gearing levels are not very aggressive for a utility asset owner, with net debt-to-equity ratio of around 1.37x, and net leverage of around 40% of assets.
Refinancing risks are also limited in the near term. While there is no statutory cap on gearing levels, we estimate that the Trust could look at acquisition targets above S$500m enterprise value range funded by a 2:1 debt: equity mix. The right of first refusal (ROFR) option provided by Sponsor Keppel Infrastructure to the Trust offers easy targets in the near to medium term.

Sale of the underperforming Basslink asset would remove sentiment overhang. We also look forward to the Trust kicking off its M&A ambitions in FY18.

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.

Keppel Infrastructure Trust (KIT) declared DPU of 0.93Scts for 4QFY17, another steady quarter, as expected.
Group revenue was up 4% y-o-y and flat q-o-q at S$158m in 4Q17 but distributable cashflows – the key number for KIT – was down 4% y-o-y and 24% q-o-q to S$30.8m. This was mainly owing to a time lag in the adjustment of gas tariffs at City Gas, as underlying fuel prices rose during the quarter, but should smoothen out over time.
There were also some one-off maintenance costs at the Ulu Pandan plant during the quarter. Cash flows from other key assets remained stable. Basslink continued to generate positive funds from operations, but the Trust does not use these cash flows for distribution purposes, rather for servicing loans.
Full year distributable cash flows amounted to S$144.2m in FY17, compared to distribution payout of S$143.6m.

In late November 2017, Keppel Infrastructure Trust (KIT) announced that it has received a number of inquiries from third parties interested to acquire KIT's stake in Basslink.
While Basslink does not affect KIT’s distributions or our valuation, a sale of Basslink at a reasonable price which covers the existing debt of around A$700m would remove a key sentiment overhang for the stock, as it has been a source of negative newsflow and concerns over the past several quarters. However, in late December 2017, offtaker Hydro Tasmania released the reports of its own independent investigation into the December 2015 cable failure, which indicates that it was not a force majeure event as claimed by Basslink, but rather a fallout of Basslink operating the cable beyond its design limit. This indicates another round of dispute over compensation levels, which could derail the sales process for Basslink.

Keppel Infrastructure Trust's share price re-rating since 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.

Based on our DDM-based valuation methodology (cost of Equity: 5.5%), we derive a valuation of S$0.60 for Keppel Infrastructure Trust.
The Trust is currently trading at a yield of 6.4% based on annual distribution forecast of 3.72Scts in FY18.
Given the total return potential of about 10% (including dividends) at current price, we maintain our BUY call on the stock.

Suvro SARKAR DBS Vickers | Glenn Ng DBS Vickers | http://www.dbsvickers.com/ 2018-01-23

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.600 Same 0.600