Keppel Infrastructure Trust (KIT) has a diversified portfolio of highly defensive and resilient businesses and assets that provides essential products and services to a wide array of customers.
These services include:
- Distribution & Network
- Energy
- Waste & Water
The breakdown of their business are as follows:
I do not have much to say for their Energy segment. In my perspective however, their Distribution & Network segment provides the essentials (gas and important chemicals for waste treatment) which will continue to run even if the country goes into lock-down. Think of it as them supplying the gas to your house for you to cook, which you will be doing on a daily basis.
Their Waste & Water segment too will continue to function. Furthermore the customers you can see are Singapore government linked. I like to think that the government is among the most unlikely to default on payments especially in this essential industry. This contributes to the stability of their income.
In view of the recent Covid-19, where major businesses have been disrupted, KIT has emerged relatively unscathed. This is due to their business is one that is essential, not because it is branded as essential by the government, but essential from a consumer’s standpoint. In other words, regardless of the external environment, consumers will continue to utilize their services.
The recent acquisition of Ixom HoldCo Pty Ltd (Ixom) is seen to be yield accretive. Ixom is a market leader in water treatment and chemical distribution in Australia and New Zealand, with a growing presence in North and South America and Asia. The inclusion of Ixom from 2019 onward will further strengthen the sustainability of the Company’s cash flows.
It is a good signal, highlighting to me the opportunities KIT can take to expand their asset base. A stronger asset base also opens more opportunities for KIT to make further acquisitions.
Dividends
KIT have been able to sustain their dividend payouts of 3.72 cents per share based on their operating cash-flows. This translates to a healthy 7.4% dividend yield based on the current share price of $0.50 per share, and they have not missed their dividend payments since 2016.
Key things to note
Growing towards asset light
KIT has a wide range of plants and operations. By no means it is an asset light Company. However from an accounting point of view, they have been paying out dividends that is higher than their earnings. This is possible because of the high depreciation, which is a non-cash adjusting expense.
The result is that the net asset value of the Company will continue to decrease as they continue to pay out the dividends. Eventually if they would like to secure new financing, their balance sheet will seem to have insufficient assets to pledge as collateral for new borrowings.
High net debt to equity
KIT has a net debt to equity ratio of 120%. While it does not have the same restrictions imposed by the Monetary Authority of Singapore (MAS) as compared to Real Estate Investment Trusts, a debt heavy Company may face difficulties in refinancing.
This may limit further merger and acquisition opportunities which instead, have to be sustained through equity fund raising. Rights may have to be issued and existing holders will have to subscribe to avoid their own holdings from being diluted.
Furthermore any disruptions in their income may result in incapability to repay their financing obligations. Breaches in covenants may result in unfavorable actions taken against them, such as fire selling of their assets to raise the cash required.
Conclusion
In view of the above, investors need to take note that buying into KIT should mainly be seen as looking for a stable income investment. Admittedly, there is limited opportunity for the Company to experience strong capital growth as compared to other industries where new breakthroughs can send the share prices skyrocketing. Any new growth is more likely to at best lead a small appreciation in share price.
If you are willing to trade away capital gains for a peace of mind, KIT is worth your time to look into it.
