SINGAPORE (Oct 18): DBS Group Research is reiterating its “buy” recommendation on Keppel Infrastructure Trust (KIT) with a target price of 58 cents.
This came on the back of the trust announcing that its 3Q19 DPU has remained flat y-o-y at 93 cents.
Distributable cash flow for the quarter came in at $55.7 million, a 61% y-o-y increase over the corresponding period.
On a q-o-q basis, distributable cash flows were 22% higher, which leaves a significant buffer over and above the quarterly distribution payout of $46.4 million. This was due to a strong performance from recently acquired Australian chemical distributor Ixom, which benefited from seasonal high demand factors in the second half of the year.
Revenue saw a significant jump to $407.5 million from $162.0 million last year, largely driven by the consolidation of Ixom from Feb 19, 2019, which contributed revenue of $249.3 million.
Meawhile, KIT will be divesting its 51% stake in associate DC One to Keppel DC REIT for $102.9 million. The net proceeds are estimated to be around $51 million and expected to be redeployed into future acquisitions. This divestment is also expected to improve the trust’s gearing position further, putting it on a firm footing for the future.
In a Tuesday report, analyst Suvro Sarkar says, “We do not expect any lumpsum distributions accruing from the sale proceeds.”
On the other hand, Basslink continues to maintain its position that the Basslink Interconnector failure, which led to a six-month outage in 2016, was a Force Majeure Event under the Basslink Operations Agreement and Basslink Service Agreement and strongly denies all allegations made by the State of Tasmania and Hydro Tasmania, who are its counterparties.
Although Basslink is vigorously defending itself in the arbitration, the management has said that proceedings will conclude in 2020. But the analyst believes this may drag on for longer.
“We believe the Trust is sufficiently protected from ongoing issues at Basslink. While there is no agreement yet on the loan refinancing, there is no contractual recourse to KIT under the project financing arrangements. As far as arbitration proceedings go, even in the worst case scenario, KIT should not be liable for any damages as any claims against Basslink are ring-fenced at the Basslink level,” says Sarkar.
Since the trust does not depend on cash flows from Basslink for distributions, the analyst says that any negative newsflow from this is at best an irritant and will not affect KIT’s financials.
As at 3.15pm, units in KIT are trading at 55 cents or 1.8 times FY19 book with a dividend yield of 6.8%.
