DBS Group Research’s Suvro Sarkar has maintained his “buy” rating on Keppel Infrastructure Trust (KIT), along with a raised target price of 58 cents, higher than the previous figure of 57 cents.
Sarkar said KIT should be able to maintain its record of steady distributions per unit (DPUs) in 2HFY2020, as distributable cash flows for the first nine months have provided a sufficient buffer.
See also: Keppel Infrastructure Trust 1Q DPU remains flat at 0.93 cent
He noted all the group’s assets have remained operational as essential services in 2020, demonstrating the resilient nature of the portfolio.
As such, he remains positive on KIT’s revenue, earnings before interest, taxes, depreciation, and amortization (EBITDA) and distributable cash flow for FY2020/2021.
Group EBITDA for 3QFY2020 was up 7% y-o-y to $83 million but operational cash flows were down 16% y-o-y to $53.4 million.
This was due to higher capital expenditure (capex) incurred during the quarter, especially at Australian chemical group Ixom, that had earlier been deferred owing to the pandemic impact in 1H20.
Sarkar also noted distributable cash flows was down 27% q-o-q to $45.2 million, but this slowdown was largely expected as cash flows in the previous two quarters had been higher than normal, owing to deferment of capex at Ixom and tariffs playing catch-up at City Gas.
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He pointed at an “exceptionally strong” 2QFY2020 cash flow, which came in at $62.2 million, up 22% q-o-q and 36% y-o-y.
In addition, overall 9MFY2020 distributable cash flows came in at $158.5million, up 6% y-o-y, and is well above the payout requirement of $139.3 million for the same period, leaving a significant buffer for the future.
As for its subsidiaries, Sarkar said Ixom “should also be able to weather the storm better than we had earlier anticipated.”
He pointed out KIT’s distributable cash flows are in any case “largely immune” to economic cycles as most assets derive availability-based revenues, and no liquidity or solvency issues are forecast for the Trust in the near term.
Furthermore, Sarkar said KIT is “sufficiently protected” from the troubles at Basslink, which is in arbitration proceedings against its counterparties related to a 6-month outage in 2016.
He expects that even in the worst-case scenario, KIT should not be liable to pay any damages, as any claims against Basslink are ring-fenced at the Basslink level.
In any case, KIT does not depend on cash flows from Basslink for current distributions, and project loans are also non-recourse to KIT.
DBS ascribes zero value to Basslink in their valuations for KIT, and therefore, they said “any negative newsflow from Basslink is an irritant at worst and would not affect KIT’s fundamentals.”
As at 12.18pm, shares of KIT were trading at 55 cents, with an FY20 price to book ratio of 2.3 and a dividend yield of 6.8%.
