On 3 May 2024, Keppel Infrastructure Trust (“KIT”) announced their 2024 first quarter business update. Their distributable income for the quarter is sufficient to sustain their dividend payout. However, it has decreased significantly compared to the same period in the previous financial year. Without excess buffer from distributable income, this caused gearing to increase unfavorably as their balance sheet cash decreased with the payout in February 2024.
This is something investors will need to keep in mind as the reason KIT is able to distribute dividends that are not supported by earnings per unit is because distributable income adjusts for non-cash items. This is nothing new as other trusts such as NetLink NBN Trust (SGX: CJLU) and CapitaLand China Trust (SGX: AU8U) also do the same thing. For KIT, the total cash generated from operating activities in their FY2023 statement of cash flows amounted to SGD292 million, which is more than sufficient to sustain dividend payouts annually of approximately SGD191 million (excluding the special dividend).
However, with KIT’s aggressive adjustments and paying dividends out of cash flows, this will result in a decrease in their unitholders’ funds and net asset value. This is because although depreciation and amortisation are non-cash items, they are still expenses in the profit or loss statement. The resulting retained earnings will continue to decrease, as evident by the downtrend of net asset value per unit over the last few quarters. The implications are included in the “Key things to note”, and investors will need to determine their risk appetite.
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.
Key Metrics
Distributable Income
| Metrics | Current | Previous |
|---|---|---|
| Distributable Income | -29.1% | +42.4% |
For the first quarter of 2024, distributable income has decreased by 29.1%. This was mainly from the lower contributions from their distribution and storage segment, as well as an increase in overall corporate expenses. No breakdown was given for the corporate expenses. This metric is Unfavorable.
Gearing Ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 41.1% | 39.9% |
Gearing ratio continues to increase to 41.1% as of 31 March 2024 compared to 39.9% in the previous quarter. The increase was mainly due to the dividend payout in the first quarter of 2024, as there were no changes noted to borrowings outstanding quarter on quarter.
Although KIT is 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 Unfavorable.
Interest Coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | No Info | 1.7x |
Based on the announcement on 3 May 2024, interest expense and profit before tax was not included in the business update for the first quarter of 2024.
The overall metric was Unfavorable as of 31 December 2023 as the interest coverage was lower than my preference of 3.0 times and may worsen. The Federal Reserve on 2 May 2024 has signalled that US borrowing costs are likely to remain higher for longer, as it wrestles with persistent inflation across the world’s biggest economy. This was after increasing the interest rates to a range between 5.25% and 5.50% on 26 July 2023.
Website: Federal Reserve chair Jay Powell signals interest rates will remain higher for longer
Debt Maturity Profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 3.1 years | 3.3 years |
Weighted average term to maturity of their debt shortened to 3.1 years as of 31 March 2024. 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 | 3.00 | 3.23 |
Based on the announcement on 3 May 2024, net asset value (“NAV”) was not included in the business update for the first quarter of 2024.
The Price to Book (“P/B”) ratio currently stands at 3.00. This is computed using the closing share price of SGD0.465 on 3 May 2024 and the net asset value per share of SGD0.155 as of 31 December 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.
Dividends
| Year | Yield | Total |
|---|---|---|
| 2024 | 2.06% | SGD 0.010 |
| 2023 | 15.35% | SGD 0.071 |
| 2022 | 8.24% | SGD 0.038 |
| 2021 | 8.00% | SGD 0.037 |
| 2020 | 6.00% | SGD 0.028 |
| 2019 | 8.00% | 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 15.35%.
As prudence it is more likely to assume that the distribution was to maintain at SGD0.0384 per share each calendar year excluding any special distribution. With a closing share price of SGD0.465 as of 3 May 2024, this translates to a healthy 8.26% dividend yield and looks to be sustained using distributable income in 2024. For my benchmark, a general reasonable range would be around an average of 5.50% to 6.50% in the current environment, and KIT have been consistent throughout the years within the expected range. The dividend yield is Favorable.
Website: Reasonable Dividend Yield 2024Q2
Do note there are differences in yield for 2024 and 2020. 2024 was due to the first payout in 2024 was only for 2023Q4 and the amount for 2023Q3 was paid out earlier with the special distribution. 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.
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 | -29.1% | Unfavorable |
| Gearing Ratio | 41.1% | Unfavorable |
| Interest Coverage | No Info | Unfavorable |
| Debt Maturity Profile | 3.1 years | Favorable |
| Price to Book Ratio | 3.00 | Unfavorable |
| Overall | Unfavorable |
Overall, the fundamentals of KIT have worsened and shifted to unfavorable territory. Their net assets continue to decrease given that the dividend payout continues to be based on EBITDA. This overall resulted in a high gearing and P/B ratio. Investors will have to ensure that they are comfortable with how the financials operate.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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