Keppel Infrastructure Trust - DBS Research 2020-04-22: Stable Dividend Is The Key Unique Selling Proposition


Keppel Infrastructure Trust - Stable Dividend Is The Key Unique Selling Proposition

  • Keppel Infrastructure Trust's distributable cash flows better than expected in 1Q20.
  • Lower FY20 EBITDA forecast by 17% to factor in coronavirus-related impact to portfolio, especially Ixom.
  • No risk to DPU projections in our view, as there is enough cash buffer at Trust level.
  • Dividend yield looks attractive at 7.8%; maintain BUY with lower Target Price of S$0.54.

Keppel Infrastructure Trust's 1Q20 distribution steady amidst volatile external environment.

  • Keppel Infrastructure Trust (SGX:A7RU) declared a DPU of 0.93 Scts for 1Q20, in line with previous quarters. See Keppel Infra Trust Announcements.
  • Group revenue was down 4% q-o-q to S$406m, as City Gas revenues were affected by lower tariffs and Ixom revenues were slightly lower seasonally. All other assets including KMC power plant performed to full capacity.

Distributable cash flows make for good reading.

  • The key metric – distributable cash flows – was up 6% y-o-y and 32% q-o-q to S$51.5m, ahead of our expectations. Ixom contributed S$16.4m in distributable cash flows, which is a strong start to the year.
  • Compared to distribution payout of S$46.4m @0.93 Scts DPU for 1Q20, Keppel Infrastructure Trust thus reported good cash flow buffer on top of distribution payout requirements. See Keppel Infra Trust Dividend History.

Balance sheet remains healthier than before.

  • With the divestment of its 51% stake in DC One to Keppel DC REIT in 4Q19, combined with the equity fund-raising (EFR) exercise and the perpetual securities issuance earlier in 2019, Keppel Infrastructure Trust’s gearing profile further has improved significantly, despite the acquisition of Ixom.
  • Net leverage (net debt/ asset) for Keppel Infrastructure Trust had improved to 34% by end-1Q20 from 41% at end-FY18. Net debt/adjusted EBITDA had similarly improved from 5.5x to 4.2x over the same time frame. This puts the Trust on a firm footing for the future. Even without raising new equity, Keppel Infrastructure Trust can look to finance new acquisitions of around S$500m or more, given the debt headroom it now has.

Restrictions related to COVID-19 will affect Ixom’s performance in FY20, but other assets should do fine.

  • Apart from City Gas and Ixom, Keppel Infrastructure Trust’s portfolio of assets receives availability-based revenues that are not dependent on actual offtake or underlying demand conditions. Hence, they are not likely to be affected by slowdown in economic activities in FY20 owing to the measures taken by the Singapore government to tackle the spread of the virus. Also, these assets fall in the category of essential services, and hence will continue operating as usual even during periods of lockdown or circuit breakers.
  • City Gas may see some slowdown in volumes from non-essential industrial demand, but residential demand should stay robust or even increase amidst stay-at-home measures. As such, we do not see any material impact on City Gas’s earnings as well in FY20.
  • Ixom had already been affected to an extent by a sharp fall in caustic soda prices in FY19, and numbers were about 5-6% below our projections. While we had earlier estimated operating improvement in FY20, Ixom’s range of chemical products is likely to see some demand impact in 1H20 at least. While most of Ixom’s end-customers are in essential services like water treatment, food & beverage, and health & personal care, some customers in the mining industry and pulp and paper industry would see shutdowns for a few months, affecting demand.
  • We estimate a 10% fall in Ixom’s revenues in our base-case scenario of normalcy returning to the market in 2H20, but in the worst-case scenario of extended lockdowns, Ixom’s revenues could decline by 20% or more in FY20. This impact is magnified at Keppel Infrastructure Trust level owing to weaker AUD vs SGD assumptions.

Revenue and earnings estimates moderated but should not affect DPU.

  • Overall, we have cut our FY20 revenue forecast for Keppel Infrastructure Trust by around 13% and FY20 reported EBITDA by around 17% to factor in the impact from Ixom (including currency translation impact) described above, as well as some revenue impact from City Gas owing to lower city gas tariffs.
  • For FY21, the downward revisions to revenue and EBITDA are 8% and 11% respectively. We are projecting a swing to losses on the bottom line now, but net profit is not an important metric for KIT, as distributable cash flows are derived from EBITDA level.
  • We do not forecast any impact on distributions in FY20/21, and expect Keppel Infrastructure Trust to maintain 3.72-Sct annual distributions as any minor distributable cash flow shortfall can be smoothened out by drawing down gross cash reserves on its balance sheet, which amounted to around S$442m as of end-1Q19.

Worst-case scenario for Ixom unlikely to materialise.

  • Indicators in Australia and New Zealand, which are the core markets for Ixom, are looking positive for now though, with the number of new cases reducing. It looks like curve flattening has been achieved in the region, and lockdowns and restrictions could be progressively lifted in coming weeks. So, we do not think the worst-case scenario for Ixom will materialise.

Maintain BUY with reduced Target Price of S$0.54.

  • Taking a more conservative view on Ixom’s distributable cash flow profile, at least in the near term, we thus lower our DDM-based Target Price for Keppel Infrastructure Trust to S$0.54.
  • Overall, we are still positive on Keppel Infrastructure Trust as
    1. there is no risk to annual DPU forecast as distributable cash flows are significantly immune to economic cycles and Keppel Infrastructure Trust has enough gross cash buffer on balance sheet to smoothen out one-off dips, if any,
    2. there are no liquidity or solvency issues forecast; loans due in 2020 should be refinanced, albeit at possibly slightly more onerous terms, and
    3. adverse credit and legal events at Basslink, if any, are non-recourse to the Trust.

Longer term, we believe the Ixom acquisition has been a step in the right direction

Switching to half-yearly reporting and distributions from 2H-FY20.

  • In line with recent amendments to SGX rules, Keppel Infrastructure Trust will adopt half-yearly announcement of financial statements with effect from the second half of FY20. For the first half of FY20, it will continue quarterly reporting before transitioning to half-yearly announcement of financial statements for 2H-FY20. With effect from 2H-FY20 and in lieu of announcing the quarterly financial statements, the Trustee-Manager will provide interim business updates on Keppel Infrastructure Trust’s performance.
  • In line with the transition to half-yearly reporting of financial results, Keppel Infrastructure Trust will also make distributions at half-yearly intervals with effect from 2H-FY20. Accordingly, Keppel Infrastructure Trust will make final quarterly distributions to its unitholders for 2Q20 before commencing with half-yearly distributions from 2H-FY20. So, we expect 0.93-Sct quarterly dividends for 1Q20 and 2Q20, and 1.86 Scts for 2H-FY20.

Suvro SARKAR DBS Group Research | https://www.dbsvickers.com/ 2020-04-22
SGX Stock Analyst Report BUY MAINTAIN BUY 0.580 SAME 0.580