On 2 November 2023, Keppel Infrastructure Trust (“KIT”) announced their 2023 third quarter business update. With this announcement, they have also included a special distribution of SGD0.0233 per share, something that was not seen for the last few years. Naturally, the share price increased to a high of SGD0.505 per share on 6 November 2023 with this news and fell to SGD0.460 on 10 November 2023 after the ex-dividend date accordingly by the dividend per share amount.
With the special distribution, it indicates management decision to share any future increase in distributable income with the unitholders. This is a welcome sign given that KIT has been able to generate more than sufficient cashflows to pay the dividends in the previous financial years. It adds flexibility, given that I would not mind for them to use the income to paydown their debt as well.
It does remain to be seen if they intend to continue this trend into 2024. Their financials have remained stable. If we were to exclude this capital optimisation, it was worth noting that their distributable income for the 9 months ending 30 September 2023 remain relatively unchanged when compared to the same period in the previous financial year. There is therefore a possibility that the dividend yield may revert back to the same as the previous calendar years.
General Announcement::Keppel Infrastructure Trust 9M 2023 Financial Results
Photo source: https://www.kepinfratrust.com/
Background
KIT is the largest diversified business trust listed in Singapore. 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 | +93.2% | +51.8% |
It was noted that distributable income have increased by 93.2% to SGD266 million for the 9 months ending 30 September 2023 as compared to the same period in 2022. This was mainly due to the capital optimisation from Ixom of SGD131 million.
As the capital optimisation is a one-off adjustment, if we want to look at the underlying, we should exclude it from the distributable income. Worth noting that the distributable income from assets amounted to SGD210 million.
Corporate expenses this quarter also included higher management fees from the capital optimisation. Using the previous announcement as a reference, corporate expenses in for the first half of 2023 was 50% higher than the first half of 2022. Therefore a reasonable corporate expense excluding higher management fees would be approximately SGD68 million for the 9 months ending 30 September 2023 using the SGD45 million for the 9 months ending 30 September 2022 as a base.
Taking into consideration the two adjusted numbers above, distributable income from operations for the 9 months ending 30 September 2023 would be approximately SGD142 million. This would represent an increase of 2.9% as compared to the same period in the previous financial year.
Therefore although there has been a substantial increase in distributable income, this metric is Neutral as the underlying assets was not the main contributor of the increase. Management have definitely been kind to distribute to unitholders this one-off gain, but it remains to be seen if in the future this will be sustainable.
Gearing Ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 36.8% | 38.5% |
Gearing ratio stands at 36.8% as at 30 September 2023 compared to 38.5% in the previous quarter. The decrease was mainly due to further repayments using the proceeds from the equity fund raising in 2023Q2.
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, this metric is Favorable.
Interest Coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 1.7x | 1.6x |
If using the same computation as REITs (EBIT/net interest expense), as of 30 September 2023 the EBIT of the trust is SGD209 million while finance costs is SGD121 million. This translates to interest coverage of 1.7 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 7 November 2023 have indicated that interest rates need to stay high for a longer period of time and higher interest rates may be needed. This was after having increased the interest rates to a range between 5.25% and 5.50% on 26 July 2023, the highest level in 22 years. There is a possibility that long-term interest rates may see an increase over the next few months.
Website: US Fed official expects further rate hike needed
The sensitivity analysis using the information as at 30 September 2023:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $2,500,000 |
| Debt Not Hedged (%) | 21.2% |
| Debt at Floating Rate Exposed | $530,000 |
| 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 | -$2,650 | -1.2% |
| + 100 bps | -$5,300 | -2.4% |
| + 150 bps | -$7,950 | -3.6% |
| + 200 bps | -$10,600 | -4.8% |
| + 250 bps | -$13,250 | -6.0% |
| + 300 bps | -$15,900 | -7.1% |
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 | 3.4 years | 2.8 years |
Weighted average term to maturity of their debt stands at 3.4 years as at 30 September 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 | 2.35 | 2.44 |
The Price to Book (“P/B”) ratio currently stands at 2.35. This is computed using the closing share price of SGD0.460 on 10 November 2023 and the net asset value per share of SGD0.196 as at 30 September 2023.
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 10 November 2023.
Dividends
| Year | Yield | Total |
|---|---|---|
| 2023 | 15.52% | SGD 0.071 |
| 2022 | 8.33% | SGD 0.038 |
| 2021 | 8.09% | SGD 0.037 |
| 2020 | 6.07% | SGD 0.028 |
| 2019 | 8.09% | SGD 0.037 |
| 2018 | 8.09% | SGD 0.037 |
In 2023, there was a special distribution of SGD0.0233 per share. This resulted in the total dividends for the calendar year to increase to SGD0.071 per share and a dividend yield of 15.52%.
This may be a good indication of management intentions to distribute special distributions in the future. With KIT’s increasing distributable income, this may translate to higher dividend in the future.
Nonetheless, as prudence it is more likely to assume that the distribution was to maintain at the current rate of SGD0.0384 per share each calendar year excluding any special distribution. With a closing share price of SGD0.460 as at 10 November 2023, this translates to a healthy 8.33% dividend yield and looks to be sustained in 2023.
Do note the difference in yield for 2020 was due to the 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 6.0% to 7.0% in the current environment, and KIT have been fairly consistent throughout the years within the expected range.
Website: Reasonable Dividend Yield 2023Q4
The dividend yield is Favorable.
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.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distributable Income | +93.2% | Neutral |
| Gearing Ratio | 36.8% | Favorable |
| Interest Coverage | 1.7x | Unfavorable |
| Debt Maturity Profile | 3.4 years | Favorable |
| Price to Book Ratio | 2.44 | Unfavorable |
| Overall | Neutral |
Overall, the fundamentals of KIT have remained relatively unchanged and is still in the neutral territory. Excluding the special distribution, it can be seen that KIT continues to use the retained income to paydown their debt. Moving forward, there is expectation that they will continue to be able to improve their financials.
Gentle reminder that 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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Website: Keppel Infrastructure Trust (SGX: A7RU): 2023 Half Year Result
