Keppel Infrastructure Trust (“KIT”) is the largest diversified business trust listed in Singapore with approximately $5 billion in assets under management.
The Trust was constituted on 5 January 2007 under the laws of the Republic of Singapore and registered with the Monetary Authority of Singapore (registration number 2007001).
KIT’s portfolio comprises strategic businesses and assets in the three core segments of Energy Transition, Environmental Services, and Distribution & Storage. These businesses and assets provide essential products and services across a broad range of industries; and generate regular and resilient cash flows, with potential for growth that is supported by favorable long-term market dynamics and demand. This is in line with KIT’s long-term goal of delivering sustainable and growing returns to Unitholders, through a combination of recurring distributions and capital appreciation.
Keppel Infrastructure Fund Management Pte Ltd (“KIFM”) is the Trustee-Manager of KIT. KIFM is a wholly-owned subsidiary of Keppel Capital, a premier asset manager with a diversified portfolio in real estate, infrastructure, data centres and alternative assets in key global markets.
Keppel Infrastructure Holdings Pte. Ltd., a wholly-owned subsidiary of Keppel Corporation Limited, is the Sponsor of KIT.
The breakdown of their business are as follows:
Key Metrics
Free Cash Flow to Equity (“FCFE”) and Payout ratio
Unlike Real Estate Investment Trusts (“REITs”), KIT is a business trust and are not imposed the same regulations as REITs.
This gives management flexibility in determining the metrics to be used. For instance, instead of using Distribution per Unit (“DPU”) as most other REITs, Free Cash Flow to Equity (“FCFE”) was used instead. There are certain considerations that need to be taken note of which will be covered in the “Key Things to Note” section later on.
Based on the announcement on 26 January 2022, it was noted that FCFE have decreased significantly by 14.8%. This was due to the the following:
- Decrease in FCFE from City Energy, noted to be due to the rising costs with the increase in oil prices
- Decrease in FCFE due to increases expenses and distribution paid to perpetual securities holders, management fees and financing costs
This metric is Unfavorable as there is deterioration in FCFE. Using the total distributions paid to unitholders of the Trust in FY2021 of SGD185 million, the FCFE is only slightly sufficient to cover the distributions paid. This does not take into consideration the potential increase in distributions moving forward into FY2022 and increases in management fees with the changes in fee structures.
Furthermore, the results for Q1 was also sub-par, and given the extended Russia invasion of Ukraine, this metric may deteriorate further as costs continue to increase.
Website: Keppel Infrastructure Trust posts 21% decline in Q1 distributable income
Capacity
KIT uses Capacity rate unlike REITs which uses Occupancy rates. As at 31 December 2021, KIT have met and fully utilized their capacity requirements. This is considered to be Favorable.
Gearing Ratio
Gearing ratio stands at 20.3% as at 31 December 2021. It is also worth nothing that their gearing have increased back to 32.6% as at 31 March 2022. This is however still considered Favorable as it means there is sufficient headroom for KIT to pursue growth opportunities.
Website: Keppel Infrastructure Trust posts 21% decline in Q1 distributable income
Interest Coverage
The interest coverage ratio based on management for the trailing 12 months stands at 62 times. However it is worth noting that unlike REITs, KIT computes their interest coverage ratio based on adjusted EBITDA/net interest expense.
If using the same computation as REITs (EBIT/net interest expense), there is insufficient interest coverage as the EBIT of the trust is in a loss position. So while they generate sufficient cash flows to pay the interest, profits (or in this case the loss) are not sufficient to cover the interest expenses. This is Unfavorable in my opinion.
Debt Maturity Profile
Weighted average term to maturity of their debt stands at 3.4 years as at 31 December 2021. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.
Price to Book Ratio
The Price to Book (“P/B”) ratio currently stands at 2.488 This is computed using the closing share price of SGD0.555 on 29 April 2022 and the net asset value per share of SGD0.223 as at 31 December 2021.
The P/B ratio is Unfavorable as there are other business trusts, such as Ascendas India Trust and NetLink NBN Trust, which have lower P/B ratios as at 29 April 2022.
Dividends
KIT have been able to sustain their dividend payouts of SGD 0.00372 per share annually based on their operating cash-flows. This translates to a healthy 6.70% dividend yield based on the current share price of $0.555 per share, and they have not missed their dividend payments since 2016.
Do note the difference in yield for 2020 was due to the their change in dividend payout policy from quarterly to semi-annually. There was thus no payout in September 2020.
Management have even increased their dividend paid in February 2022, the first of such a move after years of maintaining their dividend paid. Moving forward however, it remains to be seen if their FCFE is able to sustain their dividend payout, as noted above that there is a decrease in FCFE in FY2021 and expected further deterioration in FY2022.
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 are higher than their earnings. This is possible because of the high depreciation, which is a non-cash adjusting expense, resulting in high EBITDA as compared to profits.
For illustration purposes, imagine a scenario where you are in the business of car rental. The useful life of cars in Singapore companies are generally 10 years. This is due to the Certificate of Entitlement (“COE”) lasts only 10 years, and the value of the car is thus depreciated over its 10 years useful life. However, over the course of the 10 years, at the end of the useful life with the expiry of the COE, you will need to pay an equivalent amount to purchase a new car with a new 10 year COE. The new purchase would not be possible if you pay out dividends based on EBITDA and have no cash savings from the dividend expense.
What management is saying is that the assets of KIT do not have a high replacement cost at the end of its useful life. and the assets will still be able to continue to operate indefinitely. Thus they do not need to save money from the depreciation expense for a potential replacement of the assets.
The result is that the net asset value of the Company will continue to decrease as they continue to pay out the dividends sustained using EBITDA. 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.
Increasing Costs
Continued supply chain disruptions and inflation are only going to add to the costs for all businesses to run. In fact the impact can already be felt in FY2021 for KIT, with the fall in FCFE. This is exacerbated with the Russia invasion into Ukraine, we can expect to see costs increase further into FY2022.
Furthermore, KIT have also announced to raise SGD250 million via 4.11% notes. The interest rates of 4.11% is significantly higher than their average debt. This may have been in view of the expected increase in interest rates as governments around the world look to combat inflation. Nonetheless will affect KIT’s bottom-line.
Website: Keppel Infrastructure Trust proposes S$250 million 4.11% notes due 2027
Conclusion
In view of the above, there are indicators that the metrics will continue to deteriorate into unfavorable territory. Despite their stable dividend yield, investors need to continue monitoring the performance of KIT.
There is also 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.
However, as KIT is a business trust, the financials and metrics are not similar to REITs and they have different performance indicators in mind. Investors will thus have to ensure that they are comfortable with how the financials operate, and I am of the view their assets warrant this kind of accounting treatment.
Considering it has an expensive P/B ratio, investors should consider adding on retracements. A share price of SGD0.45 would be good given this historical trends and also will be 2 times its net asset value as at 31 December 2021.
