Keppel Infrastructure Trust - DBS Research 2020-10-23: DPUs To Stay Firm In Near Term

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KEPPEL INFRA TRUST WEF 2015 (SGX:A7RU)

Keppel Infrastructure Trust - DPUs To Stay Firm In Near Term

• Keppel Infrastructure Trust's 9M20 distributable cash flows in line with estimates.
• Keppel Infrastructure Trust has moved to semi-annual DPUs from 2H20, should be paying out 1.86 Scts per share for 2H20.
• Further M&A activity will be key catalyst.
• Maintain BUY with slightly higher Target Price of S$0.58.

Keppel Infrastructure Trust's 3Q20 operational update springs no surprises.

• Keppel Infrastructure Trust (SGX:A7RU) will be switching to semi-annual reporting and semi-annual distributions from 2H20, and hence provided operational updates only.
• Group EBITDA for 3Q20 was up 7% y-o-y to S$83.0m but operational cash flows were down 16% y-o-y to S$53.4m. This was due to higher capex incurred during the quarter, especially at Ixom, that had earlier been deferred owing to the pandemic impact in 1H20.
• There were no operational disruptions at any asset in Keppel Infrastructure Trust’s portfolio YTD in 2020, demonstrating highly resilient and stable operations.

Distributable cash flows lower than last two quarters owing to timing effects.

• The key metric – distributable cash flows – was down 27% q-o-q to S$45.2m, but this slowdown was largely expected as cash flows in the previous two quarters had been higher than normal owing to deferment of capex at Ixom and tariffs playing catch-up at City Gas.
• Recall that distributable cash flows in 2Q20 had come in exceptionally strong at S$62.2 (up 22% q-o-q and 36% y-o-y).
• Overall 9M20 distributable cash flows came in at S$158.5m (up 6% y-o-y) and is well above the payout requirement of S$139.3m for the same period, leaving significant buffer for the future.

Ixom’s performance remains on track.

• Ixom delivered S$13.2m in distributable cash flows for 3Q20, which was lower on y-o-y basis, mainly impacted by budgeted capex that was deferred from 1H20. Excluding the deferred capex, 3Q20 distributable cash flows would have been on par with 3Q19 levels.
• Having already delivered S$52.6m in distributable cash flows in 9M20, Ixom looks set to beat our estimate of S$60m for the full-year FY20.
• Despite continued lockdowns in part of Australia, business sentiment has progressively improved in Australia and New Zealand, supporting strong operational performance.

Demand from the life science and dairy segment remains healthy.

• Other assets are even 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. Hence, they are not likely to be affected by slowdown in economic activities in FY20 owing to the pandemic. Also, these assets fall in the category of essential services, and hence will continue operating as usual even during lockdowns.
• City Gas saw some slowdown in volumes from non-essential industrial and commercial demand, but residential demand increased amidst stay-at-home measures. Thus, we do not see any material impact to City Gas’s overall earnings in FY20.

Keppel Infrastructure Trust's balance sheet remains healthy.

• Net leverage (net debt/ asset) for Keppel Infrastructure Trust had declined to 34% at end-3Q20 from 41% at end-FY18.
• Net debt/adjusted EBITDA has similarly improved from 5.5x to 4.2x over the same period. This puts the Keppel Infrastructure Trust on a firm footing for the future. Even without raising new equity, we estimate that the Trust can look to finance new acquisitions of around S$500m or more, given the debt headroom it now has.

Maintain BUY with slightly higher Target Price of S$0.58.

• Taking a more positive view on Ixom’s distributable cash flow profile, our DDM-based Target Price for Keppel Infrastructure Trust increases to S$0.58.
• 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.
• Overall, we remain positive on Keppel Infrastructure Trust because
  1. there is no downside 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 its balance sheet to smoothen out one-off dips, if any,
  2. no liquidity or solvency issues forecast; loans due in 2020 should be refinanced, and
  3. adverse credit and legal events at Basslink, if any, are non-recourse to the Trust.

Suvro SARKAR DBS Group Research | https://www.dbsvickers.com/ 2020-10-23

SGX Stock Analyst Report BUY MAINTAIN BUY 0.58 UP 0.570