DBS Group Research analyst Suvro Sarkar has maintained “buy” on Keppel Infrastructure Trust (KIT) with a higher target price of 61 cents from 58 cents previously due to better-than-expected cash flows from Ixom, Blackstone’s Australian chemicals business formerly owned by Orica.
KIT completed its acquisition of Ixom on Feb 19, 2019. The acquisition was said to augment KIT’s portfolio in the distribution and network segment.
For the FY2020 ended December, KIT reported distribution per unit (DPU) of 3.72 cents and 4QFY2020 DPU of 1.86 cents, unchanged from a year ago.
See: Keppel Infra Trust declares unchanged 4Q20 DPU of 1.86 cents, reports overall loss for FY2020
Sarkar says he remains overall positive on the counter as the trust’s distributions are not affected by the Covid-19 pandemic, which is rare compared to other Singapore REITs (S-REITs).
“Unlike REITs, there is no risk to annual DPU forecast as distributable cash flows are significantly immune to economic cycles,” he says, noting that KIT’s distributable cash flows for FY2020 increased by 20% y-o-y.
The analyst also expects the trust to continue performing well as KIT’s management continues to deliver on its acquisition promise for a “diversified and enhanced asset base, with a focus on extending the life of distributions”.
Following the acquisition of Ixom in 2019, management acquired an 80% interest in a petroleum tank storage in the Philippines.
“This should boost distributable cash flows by around 6% and extend the life of distributions,” says Sarkar.
Furthermore, KIT carries an attractive DPU yield of 6.8% at its current price, which is higher than most top tier REIT or business trust peers in the Singapore market, which carries little downside risk in the near term, he adds.
“We believe the trust is sufficiently protected from the troubles at Basslink. While the arbitrator has recently ruled against Basslink, KIT will not be liable to pay any damages as any claims against Basslink are ring-fenced at the Basslink level. To recall, KIT does not depend on cash flows from Basslink for current distributions, and project loans are also non-recourse to KIT. We ascribe zero value to Basslink in our valuations.”
However, Sarkar also notes that key risks to KIT include its plants not meeting its availability thresholds due to operational issues, increasing debt refinancing risks for its asset portfolio, as well as exposure to rising inflation and interest rates.
As at 12.11pm, units in KIT are trading 0.5 cent lower or 0.9% down at 53.5 cents, or 2.7 times price-to-book (P/BV) according to DBS’s estimates.
