On 14 April 2023, Keppel Infrastructure Trust (“KIT”) announced their 2023 first quarter business update and also conveniently announced an upcoming preferential offering. For those interested, the record date is 26 April 2023 which is 2 business days from the date of this article. The private placements were well received, as the share price of KIT did not drop to the private placement price.
For this first quarter 2023, distributable income have increased significantly. This is a positive for the trust considering that there is a small dilution in this quarter and there is a need for improved distributable income if KIT wants to maintain the payout per share. Currently, KIT seems on track to main the dividend payout and their income is sustainable to do so.
Nonetheless for a trust, there are still some things investors should take note of as detailed below. This includes their gearing ratio and interest coverage.
Photo source: https://www.kepinfratrust.com/
Background
KIT is the largest diversified business trust listed in Singapore with approximately SGD7.3 billion in assets under management.
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:
- Energy Transition
- Environmental Services
- Distribution and Storage
The Energy Transition segment comprises of City Energy, Aramco Gas Pipelines Company, Keppel Merlimau Cogen Plant (“KMC”) which is a cycle gas turbine power plant, European Onshore Wind Platform and a 465MW German offshore wind farm (“BKR2”).
The Environmental Services segment comprises of Senoko Waste-to-Energy (“WTE”) Plant, Keppel Seghers Tuas WTE Plant, Keppel Seghers Ulu Pandan NEWater Plant, SingSpring Desalination Plant and Eco Management Korea Holdings Co., Ltd (“EMK”).
The Distribution and Storage segment comprises of Ixom and Philippine Coastal Storage & Pipeline Corporation.
Key Metrics
Distributable Income
| Metrics | Current | Previous |
|---|---|---|
| Distributable Income | +65.5% | +15.8% |
In this quarter, management have changed their metric of “Free Cash Flow to Equity” and renamed it to “Distributable Income”, with no change to computation. Unlike Real Estate Investment Trusts (“REITs”), KIT is a business trust and are not imposed the same regulations as REITs.
For me personally, this means I will still be focused on their distributable income instead of distribution per unit (“DPU”). This is to ensure that management are taking the right steps to increase their income which in turn sustains their DPU. Their DPU have been relatively flat across the years.
Based on the announcement on 14 April 2023, it was noted that distributable income have increased by 65.5% to SGD73.9 million for the first quarter of 2023 as compared to the same period in 2022. This was mainly due to the the following:
- Ixom continues to deliver a strong set of performance
- Philippine Coastal secured additional storage demand from an anchor tenant and building new tanks in the Subic Bay Area to increase capacity
- On-track to meeting all contractual obligations for KMC and the Singapore waste and water assets
This metric is Favorable as there is as improvement in the distributable income. The total distributions paid to unitholders of the Trust annually approximates around SGD190 million, and the distributable income is able to sustain the payout. Any excess distributable income would be ideal to pay down their debts or fund new acquisitions.
Gearing Ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 42.5% | 39.8% |
Gearing ratio stands at 42.5% as at 31 March 2023 compared to 39.8% as at 31 December 2022. The increase was mainly due to drawdowns on City Energy’s SGD400 million loan facility obtained in Jan 2023 as a longer-term debt to pay down the existing bridge facilities.
Although KIT are not subjected to the same gearing requirements as REITs, the MAS rule is a safeguard to prevent the REIT from being overleveraged, which will help to protect investors capital. Using the REIT benchmarks, the metric is considered Unfavorable.
Interest Coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | No Info | 1.2x |
Based on the announcement on 14 April 2023, interest coverage and profit or loss was not included in the business update for the first quarter of 2023.
If using the same computation as REITs (EBIT/net interest expense), as of 31 December 2022 the EBIT of the trust is SGD135 million while finance costs if SGD112 million for the full financial year. This translates to interest coverage of 1.2 times and thus there is insufficient interest coverage. So while they generate sufficient cash flows to pay the interest, profits are not sufficient to cover the interest expenses comfortably.
The overall metric is Unfavorable as the interest coverage is lower than my preference of 5.0 times and may worsen. The Federal Reserve on 22 March 2023 has hiked the interest rates to a range between 4.75% and 5.00%, the highest level in 15 years and are likely to keep it at these levels over the next few years.
Website: Fed hikes rates by a quarter percentage point, indicates increases are near an end
The sensitivity analysis using the information as at 31 March 2023:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $2,900,000 |
| Debt Not Hedged (%) | 24.8% |
| Debt at Floating Rate Exposed | $719,200 |
| Distributable Income FY2022 | $222,493 |
Interest rate sensitivity analysis as below:
| Change in Interest Rates | Decrease in Distributable Income (SGD’000) | Change as % of 2022 Distribution |
|---|---|---|
| + 50 bps | -$3,596 | -1.6% |
| + 100 bps | -$7,192 | -3.2% |
| + 150 bps | -$10,788 | -4.8% |
| + 200 bps | -$14,384 | -6.5% |
| + 250 bps | -$17,980 | -8.1% |
| + 300 bps | -$21,576 | -9.7% |
Do note the above is my estimation which may be different from management’s estimation. Nonetheless, if the interest rates were to increase by the basis points above, KIT may experience a fall in distribution income accordingly.
Debt Maturity Profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 2.7 years | 2.6 years |
Weighted average term to maturity of their debt stands at 2.7 years as at 31 March 2023. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 2.64 | 2.98 |
Based on the announcement on 14 April 2023, net asset value (“NAV”) was not included in the business update for the first quarter of 2023.
The Price to Book (“P/B”) ratio currently stands at 2.64. This is computed using the closing share price of SGD0.510 on 21 April 2023 and the net asset value per share of SGD0.193 as at 31 December 2022.
The P/B ratio is Unfavorable as there are other business trusts, such as CapitaLand India Trust (SGX: CY6U) and NetLink NBN Trust (SGX: CJLU), which have lower P/B ratios as at 21 April 2023.
There is a need however to keep in mind that there are rights issues coming in the second quarter of 2023. At the current share price, these rights will be at a significant premium and will boost the NAV accordingly. Furthermore the share price have also declined recently in anticipation of the rights. Investors will need to take note of the event in the near future.
Dividends
| Year | Yield | Total |
|---|---|---|
| 2023 | 6.18% | SGD 0.032 |
| 2022 | 7.51% | SGD 0.038 |
| 2021 | 7.29% | SGD 0.037 |
| 2020 | 5.47% | SGD 0.028 |
| 2019 | 7.29% | SGD 0.037 |
| 2018 | 7.29% | SGD 0.037 |
There is an upcoming distribution with ex date 26 April 2023. This is due to the upcoming rights issue so KIT have an adjusted August 2023 payout in the future. The expectation is thus for the dividend payout per share to be similar to 2022 given the sufficient distributable income generated.
With the distribution for the calendar year 2022 of SGD0.0383 per share and closing share price of SGD0.510 as at 21 April 2023, this translates to a healthy 7.50% dividend yield and looks to be sustained in 2023.
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. They have not missed their dividend payments since 2016.
For my benchmark, a general reasonable range would be around an average of 5.5% to 6.5% in the current environment, and KIT have been fairly consistent throughout the years. KIT is within the expected range. Keep in mind however that the high yield was due to a lower share price of KIT recently due to the upcoming rights issue.
Website: Reasonable Dividend Yield 2023Q2
It is worth noting that interest for long-term safe assets are on a downtrend. The expected 10-year average interest rate for the June 2023 Singapore Savings Bond is 2.82%, which is lower than the previous few months. There is a chance with the continued decrease interest rates, the required dividend yield of investor required may not be as high as before and KIT may see share price appreciation over the next few years.
Website: Singapore Savings Bond – June 2023 – Expected 10 Year Average Yield – 2.82%
The dividend yield is Neutral.
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. This can be seen from the NAV of SGD0.193 per unit as at 31 December 2022, a decrease from SGD0.223 as at 31 December 2021. 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.
Rights issue
There is an upcoming rights issue with record date of 26 April 2023. The preferential offering will be at a price between SGD0.464 and SGD0.467 per new unit.
The private placements had “strong demand” for the placement and an oversubscription rate of about 4.2 times at SGD0.477 per unit. The private placements were well received, as the share price of KIT did not drop to the private placement price. Investors however will need to take note of the dilution as their dividend payout may be affected.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distributable Income | +65.5% | Favorable |
| Gearing Ratio | 42.5% | Unfavorable |
| Interest Coverage | 1.2x | Unfavorable |
| Debt Maturity Profile | 2.7 years | Favorable |
| Price to Book Ratio | 2.64 | Unfavorable |
| Overall | Neutral |
Overall, the improvement in distributable income is definitely a welcome one. It is a bit disappointing that the significant increase in distributable income did not translate to higher dividend for shareholders. However, I would not mind if KIT is able to use the retained income to make accretive acquisitions or paydown their debt.
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.
It is worth noting that in terms of metrics, there are more than a few where I am have marked as Unfavorable points although the overall weighting is Neutral. The reason is to point out these factors which may not be suitable for investors comfort levels as KIT is a business trust. The financials and metrics are not similar to REITs. Investors will thus have to ensure that they are comfortable with how the financials operate, and I am of the view that it is appropriate given their type of assets.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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