Keppel Infrastructure Trust - DBS Research 2020-07-23: Defying The Pandemic So Far

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KEPPEL INFRA TRUST WEF 2015 (SGX:A7RU)

Keppel Infrastructure Trust - Defying The Pandemic So Far

• Keppel Infrastructure Trust's distributable cash flows continue to exceed expectations; steady DPU of 0.93Scts in 2Q20.
• More confidence in Ixom’s ability to maintain or even better its performance in FY20 despite the pandemic.
• Stock is up 50% since the lows in March, and the secure DPU makes further re-rating possible.

Uptick in distributable cashflows a pleasant surprise; maintain BUY.

• Keppel Infrastructure Trust (SGX:A7RU) maintained its record of steady DPUs in 2Q20, on the back of better-than-expected distributable cash flows for the quarter. Ixom’s performance during the quarter was the key positive, supported by its diversified end customer base. We thus turn more positive on Keppel Infrastructure Trust’s revenue, EBITDA and distributable cash flow for FY20/21 as Ixom should be able to weather the storm better than we earlier anticipated.
• Distributable cash flows for Keppel Infrastructure Trust are in any case largely immune to economic cycles as most assets derive availability-based revenues. No liquidity or solvency issues are forecast for the Trust in the near term.

Keppel Infrastructure Trust's 2Q20 results highlights

No impact from pandemic on DPUs.

• Keppel Infrastructure Trust declared DPU of 0.93Scts for 2Q20, in line with previous quarters, bringing 1H20 DPU to 1.86Scts. Keppel Infrastructure Trust will be switching to semi-annual distributions from 2H20. Group revenue was down 5% q-o-q and 8% y-o-y to S$385m, as City Gas tariffs were lower and a small part of Ixom revenues was recognised on a commission basis instead of gross sale basis previously.
• All other assets including KMC power plant performed to full capacity, as all portfolio assets qualified as essential services.

Distributable cash flows higher than expected.

• The key metric – distributable cash flows – was up 36% y-o-y and 22% q-o-q to S$62.2m, significantly ahead of our expectations. Ixom contributed S$23.1m in distributable cash flows for 2Q20, and S$39.4m in 1H20, whereas we were expecting Ixom to fall short of S$60m distributable cash flows in full year FY20, due to the fallout from the pandemic.
• While 2H20 distributable cash flows from Ixom are likely to be lower than 1H20 owing to back-loaded maintenance capex, it still seems likely that Ixom’s contributions in FY20 will be better than earlier expected.
• The other driver for the outperformance in 2Q20 is City Gas, which benefited from the low underlying fuel costs during the quarter, and lag in tariff reset, but this is a more temporary effect and will smoothen out over the rest of the year.
• With 1H20 distributable cash flows of S$113.3m (up 20% y-o-y) compared to distribution payout of S$92.8m @0.93Scts DPU per quarter for the first two quarters of FY20, Keppel Infrastructure Trust has thus created enough buffer on top of distribution payout requirements in 1H20 amid an uncertain external environment caused by the COVID-19 pandemic.

Ixom performance a pleasant surprise.

• Ixom had been affected by a sharp fall in caustic soda prices in FY19 and this trend continues to an extent in FY20. We had earlier estimated that this will be further compounded by the demand impact from slowdown in certain industries in Australia and New Zealand due to the pandemic, as well as the weakening AUD, but things seem to have improved in 2Q20. Firstly, Ixom’s key markets were spared the worst of the pandemic and despite a second lockdown in Melbourne recently, economic activity resumed earlier than some other countries around the world.
• During 2Q20, Ixom saw stronger demand from its life science segment due to increased demand for cleaning and hygiene products, which offset continuing weaker demand from the pulp & paper and metals & mining segments. The dairy segment also saw a pick-up in volumes due to the improving drought conditions in New Zealand. Other end customers in essential services like water treatment, food & beverages see stable demand. We thus estimate only 5% fall in Ixom’s revenues now in base case scenario.
• Our AUD vs SGD assumptions are also stronger than before, thus contributing to upward revision in our estimates for Keppel Infrastructure Trust’s revenue and EBITDA in FY20/21.

Other assets are less of a concern.

• 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, and are hence, not likely to be affected by slowdown in economic activities in FY20 owing to the lockdowns or circuit breaker measures in Singapore. Also, these assets fall in the category of essential services, and hence will continue operating as usual even during period of lockdown or circuit breakers.
• City Gas saw some slowdown in volumes from non-essential industrial and commercial demand, but residential demand increased amid stay-at-home measures, hence we do not foresee material impact to City Gas earnings overall in FY20.

Balance sheet remains healthy.

• Net leverage (net debt/ asset) for Keppel Infrastructure Trust has declined to 34% at end-2Q20 from 41% at end- FY18. Net debt/ adjusted EBITDA has 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, we estimate Keppel Infrastructure Trust can look to finance new acquisitions of around S$500m or more, given the debt headroom it now has.

Maintain BUY with higher Target Price of S$0.57.

• Taking a more positive view on Ixom’s distributable cash flow profile, our DDM-based Target Price for Keppel Infrastructure Trust increases to S$0.57.
• Overall, we still remain positive on Keppel Infrastructure Trust because
  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. no liquidity or solvency issues expected; loans due in 2020 should be refinanced, and
  3. adverse credit and legal events at Basslink, if any, are non-recourse to the Trust.
• See Keppel Infra Trust Share Price; Keppel Infra Trust Target Price; Keppel Infra Trust Analyst Reports; Keppel Infra Trust Dividend History; Keppel Infra Trust Announcements; Keppel Infra Trust Latest News.

Where we differ:

• We believe Keppel Infrastructure Trust is sufficiently protected from the troubles at Basslink, which is in arbitration proceedings against its counterparties related to a 6-month outage in 2016. We expect that 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 would not affect Keppel Infrastructure Trust’s fundamentals.

Suvro SARKAR DBS Group Research | https://www.dbsvickers.com/ 2020-07-23

SGX Stock Analyst Report BUY MAINTAIN BUY 0.57 DOWN 0.580