DBS analyst Suvro Sarkar has maintained his “buy” call and target price of 60 cents on Keppel Infrastructure Trust, after the trust announced an increased distribution per unit in FY2021.
KIT announced a full-year DPU of 3.78 cents, up 1.6% compared to the same period last year.
The group also recorded free cash flow to equity (FCFE) of $192.2 million in FY2021, down 15% y-o-y.
Despite the lower FCFE, management wanted to reward its unitholders with a higher DPU – the first time in years – as its underlying businesses were performing well during the period, notes Sarkar.
The analyst adds that KIT’s “attractive” DPU yield of close to 7% at the current price is higher than most top-tier peers in the Singapore market, and carries little downside risk in the near term.
Furthermore, he believes that KIT’s distributions are not affected by economic cycles, which is a rarity in the S-REITs space.
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This is because KIT’s portfolio comprises critical infrastructure assets, which are not impacted by the pandemic.
He notes that high fuel prices may affect the timing of cash flows at City Energy (formerly known as City Gas) but otherwise, cash flows are highly predictable.
Investors who have been keeping up with the news on KIT would have known about its asset, Basslink, entering insolvency in November 2021. Basslink was unable to settle penalty payments and refinance its debts.
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However, Sarkar believes that KIT is “sufficiently protected” from the troubles at Basslink as any claims against Basslink are ring-fenced at the Basslink level, adding that Basslink has been de-consolidated from KIT’s financials and management believes there are no contingent liabilities outstanding related to Basslink.
Moving forward, he is anticipating more mergers and acquisitions (M&A) on the trust’s end, as well as potential DPU accretion after its strategic review.
“[The] strategic review under new CEO points towards bigger M&A ambitions, and this time, should be DPU accretive unlike in the past,” Sarkar says.
Elaborating, he highlights that under new CEO Jopy Chiang, there are three strategic growth pillars for KIT.
The trust will work its existing assets harder, like City Energy having new and upcoming business lines including EV charging stations, leverage the Keppel ecosystem for opportunities and access to funding, and actively pursue inorganic growth opportunities that will be yield-accretive.
Sarkar writes that the “inorganic story” will focus on traditional asset classes like utilities, transmission & distribution assets.
This is in addition to assets that will benefit from energy transition story like renewables, digital and communications assets like towers that support the digital economy, and socio-economic infrastructure assets like roads and other transport infrastructure
“The decision to increase DPUs in 2HFY2021 also signals that unlike in the past (read: Ixom and Philippine Coastal), KIT will be open to increasing distributions on the back of accretive acquisitions, in line with investor feedback.”
Despite this optimistic view, he does warn of some key risks, including KIT’s plants not meeting availability thresholds owing to operational issues, increasing debt refinancing risks for the asset portfolio, and exposure to rising inflation and interest rates.
As at 10.40am, units of KIT are trading at 55.5 cents, with an FY2022 price to book ratio of 2.8 and dividend yield of 6.8%.
