CFA Society Singapore
SINGAPORE (Apr 17): DBS Group Research is keeping its “buy” call on Keppel Infrastructure Trust (KIT) with a target price of 58 cents, following its results announcement on Monday.
KIT declared an unchanged DPU of 0.93 cent for 1Q19 ended March, as well as a loss of $16.2 million compared to earnings of $7.5 million in 1Q18.
Revenue saw a 98.7% surge to $318.5 million, from $160.3 million a year ago, largely driven by the consolidation of Ixom, which contributed revenue of $152.4 million. But total expenses more than doubled to $333.4 million from $154.6 million, outpacing the revenue increase.
Gearing stood at 44.3% as at Mar 31, 2019, due mainly to the equity bridge loan drawn down to fund the acquisition of Ixom.
The DPU recorded was in line with the research house’s expectations, on the back of better than expected distributable cash flows for the quarter.
But more importantly, the trust completed its acquisition of Ixom and a successful equity fund raising (EFR) exercise, which was well accepted by investors. These two events are significant in securing the long-term visibility of distributors for the trust.
In a Tuesday report, analyst Suvro Sarkar says, “Most of KIT’s assets derive revenue from availability-based payments, independent of actual offtake. Hence, cash flows are predictable and not significantly exposed to economic cycles.”
The analyst also views the Ixom deal as a positive move by KIT’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.
The Ixom acquisition was partially funded by the EFR exercise, which saw strong support from the investment community. This allows the trust to then raise equity at a minimal discount to prevailing market prices, meaning that KIT will be able to digest the acquisition without affecting DPU (new shares issued accounted for less than 30% of existing base), and keeping leverage ratios (net debt/ asset) practically unchanged at around 40%.
Furthermore, Sarkar believes that KIT is sufficiently protected from troubles at Basslink, which is in the midst of arbitration proceedings against its counterparties related to the outage in 2016.
“We expect that even in the worst case scenario, KIT should not be liable to pay any damages as any claims against Basslink are ring-fenced at the Basslink level. In any case, KIT does not depend on cash flows from Basslink for current distributions, and project loans are also non-recourse to KIT,” adds Sarkar, who sees the Basslink case as “an irritant at best” and does not believe that it will affect KIT’s fundamentals.
As at 3.05pm, units in KIT are trading at 48 cents or 1.6 times FY19 book with a dividend yield of 7.8%.