Keppel Infrastructure Trust - DBS Research 2020-01-22: More Debt Headroom To Pursue M&A

KEPPEL INFRA TRUST WEF 2015 (SGX:A7RU)

Keppel Infrastructure Trust - More Debt Headroom To Pursue M&A

Keppel Infrastructure Trust (SGX:A7RU) maintained its record of steady DPU of 3.72 Scts in FY19, as expected, on the back of healthy distributable cash flows for the year.
Keppel Infrastructure Trust completed the acquisition of Australian chemical distributor Ixom in early 2019, and subsequent rounds of equity fund raising (EFR) exercise of around S$500m and perpetual securities issue worth S$300m to fund the acquisition were well accepted by investors. Proceeds from divestment of associate DC One should further enhance its capability to pursue future M&A activities. Meanwhile, existing portfolio cash flows remain predictable and are not significantly exposed to economic cycles, as many of Keppel Infrastructure Trust’s assets derive revenue from availability-based payments, independent of actual offtake.
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Keppel Infrastructure Trust declared DPU of 0.93Scts for 4Q19, in line with previous quarters. Group revenue was up 4% q-o-q to S$422.8 m, as most assets barring KMC power plant performing to expectations during the quarter.
Revenues from KMC were down slightly owing to lower availability caused by unplanned maintenance activity during the quarter. Basslink returned to normalcy during 4Q19, after a brief outage had affected revenues in 3Q19.

The key metric – distributable cash flows – was down 30% q-o-q to S$38.9m, the weakest quarter in FY19, following a very good showing in 3Q19. FY19 distributable cash flows though came in at a respectable S$188.7m (which more than comfortably covered the distribution payout of S$175.7m for FY19), hence the full year number left no room for concern as such. New acquisition Ixom contributed around S$49m additional distributable cash flows for the year.
The underperformance in 4Q19 was due to lower City Gas contributions (lower gas tariffs, should smoothen out over time) and lower cash flows from KMC power plant, owing to reasons mentioned earlier. Contributions from Ixom normalised in 4Q19 from seasonally high levels seen in 3Q19. Contributions from associate DataCentre One (DC One) ceased during the quarter, following its divestment.

On 31 October 2019, Keppel Infrastructure Trust completed the divestment of its 51% stake in DC One to Keppel DC REIT (SGX:AJBU) for a consideration of S$102.9m. Net gain on divestment of around S$51m was recorded in 4Q19, boosting the bottomline. Actual cash proceeds from the sale, including repayment of advances, amounted to more than S$65m by our estimates, and these will add on to Group level reserves, to be deployed for future M&A activities. The divestment proceeds, combined with the equity fund raising (EFR) exercise and the perpetual securities issuance earlier in 2019, has served to improve the Trust’s gearing profile further, despite the acquisition of Ixom.
By our estimates, net leverage (net debt/ asset) for Keppel Infrastructure Trust improved to 33% at end-FY19 from 41% at end-FY18. Net debt/ reported EBITDA has similarly improved from 6.7x to 5.7x. This puts Keppel Infrastructure Trust on a firm footing for the future. Even without raising new equity, the Trust can look to finance new acquisitions of up to S$1bn, given the debt headroom it has now created.

As mentioned earlier, Ixom contributed around S$49m in distributable cash flows for the ~10.5 months of operation under Keppel Infrastructure Trust ownership. Annualised distributable cash flows from Ixom for FY19 would amount to around S$57m, slightly short of our initial estimates of S$60m.
Revenues for FY19 also came in slightly lower than FY18 by our estimates. This is largely due to sharp fall in caustic soda prices, where Ixom is exposed to market volatility. However, management remains optimistic of better performance in FY20, as it focuses on operational efficiencies, working capital and cost optimisation programmes. Ixom’s operations have not been affected by the bushfires in Australia.

While there is no respite from the arbitration proceedings yet, in a positive development, Basslink has managed to secure a 12-month extension of the remaining project loan worth around A$659m (S$610m) and a waiver by the lending syndicate of all breaches and events of default that had arisen by then. Management has currently indicated that arbitration proceedings will conclude in 2020, but we believe this could drag on for longer. We believe though that Keppel Infrastructure Trust is sufficiently ring-fenced from troubles at Basslink as there is no contractual recourse to Keppel Infrastructure Trust under the project financing arrangements. As far as arbitration proceedings go, even in the worst-case scenario, Keppel Infrastructure Trust should not be liable to pay any damages as any claims against Basslink are ring-fenced at the Basslink level. In any case, Keppel Infrastructure Trust does not depend on cash flows from Basslink for current distributions, and project loans are also non-recourse to Keppel Infrastructure Trust. We ascribe zero value to Basslink in our valuations for Keppel Infrastructure Trust, hence any negative newsflow from Basslink is an irritant at best and does not affect Keppel Infrastructure Trust’s fundamentals.

We believe the Ixom acquisition has been a step in the right direction by Keppel Infrastructure Trust’s management as it diversifies the asset base, stabilises NAV decline, lengthens the effective life of the Trust, and creates organic growth potential which was largely missing till now. With an enhanced asset base and stronger balance sheet, we look forward to further acquisition trajectory.
Dividend yield has compressed to around 6.9% currently, which demonstrates investors’ confidence towards Keppel Infrastructure Trust’s credit profile and long-term cash flow sustainability, but we believe there is room for further yield compression, especially amid macro uncertainties creating a preference for yield.

Suvro SARKAR DBS Group Research | https://www.dbsvickers.com/ 2020-01-22

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