DBS Group Research is maintaining its “buy” call on Keppel Infrastructure Trust (KIT) at a revised target price of 57 cents. This is up 3 cents or 5.6% from its previous 54-cent call, analyst Suvro Sarkar says in a July 23 note.
He believes the revised price will give the company a positive 6% upside from its 53.5-cent close on July 22.
Sarkar’s move is in response to KIT’s “steady distribution per unit (DPU)” and “better-than-expected distributable cash flows for 2Q20 ended June”. The company had on July 22 announced a DPU of 0.93 cents, unchanged from the DPU for 2Q19.
This brings 1H20 DPU to 1.86 cents, translating to an annualised distribution yield of 5.9% based on KIT’s closing price per unit of 54 cents on June 30.
Distributable cash flows for the quarter was up 35.8% year-on-year to $62.2 million, while that for 1H20 was up 20.3% to $113.3 million.
This is “significantly ahead of expectations,” says Sarkar.
Ixom contributed $23.1 million in 2Q20 and $39.4 million in 1H20. Sarkar expects the company’s distributable cash flows to lower in 2H20, owing to back-loaded maintenance capital expenditure (capex). However, he says its full-year contributions is likely to be better than the $60 million expected.
Ixom is an industrial infrastructure business providing specialised source water and treatment solutions for clean water supply. Based in Australia and New Zealand, it also provides chemical products and industrial solutions.
To Sarkar, the company’s performance for 1H20 is “a pleasant surprise” especially since it has been affected by a sharp fall in caustic soda prices since FY19. “We had earlier estimated that this will be further compounded by the demand impact from a slowdown in certain industries in Australia and New Zealand due to the pandemic, as well as the weakening AUD, but things seem to have improved in 2Q20,” he observes.
A key contributor was the stronger demand from its life science segment, as consumers bought more cleaning and hygiene products. Its dairy segment meanwhile saw a pickup as a drought hit New Zealand.
These aspects mitigated the continuing weaker demand for its pulp & paper and metals & mining segments.
Meanwhile, City Gas meanwhile was another driver of KIT’s higher distributable cash flows, thanks to the low underlying fuel costs and lag in tariff reset. Sarkar warns that this is a “more temporary effect and will smoothen out over the rest of the year”. City Gas produces and retails town gas for clean energy solutions in Singapore.
Aside from Ixom and City Gas, KIT’s portfolio comprises Bassilink in Australia, Keppel Merlimau Cogen Plant, Senoko Waste-to-energy Plant, Keppel Seghers Tuas-to-energy Plant, Keppel Seghers Ulu Pandan NeWater Plant and the SingSpring Desalination Plant.
These assets receive “availability-based revenues that are not dependent on actual offtake or underlying demand conditions,” says Sarkar. This is as they are deemed essential services that can continue operations during a lockdown or circuit breaker.
Collectively, KIT’s stronger cash flows give it a healthy balance sheet. Net leverage (net debt/assets) dropped 34% at end 2Q20, from 41% at end FY18.
In this time, Net debt/adjusted EBITDA improved from 5.5x to 4.2x.
“This puts the Trust on a firm footing for the future,” notes Sarkar.
“Even without raising new equity, we estimate the Trust can look to finance new acquisitions of around S$500 million or more, given the debt headroom it now has”.
To this end, Sarkar says he is positive on the company as there are no risks to annual DPU forecast since its distributable cash flows are significantly immune to economic companies and the company has sufficient gross cash to smoothen one-off dips.
He adds there are no liquidity and solvency issues expected.
Units in KIT closed 1 cent higher, or 1.87% up, at 54.5 cents on July 23.
