SINGAPORE (Apr 22): DBS Group Research has maintained Keppel Infrastructure Trust (KIT)’s “buy” rating with a lower target price of 54 cents, from 58 cents previously.
This comes on the back of KIT's unchanged 1Q2020 DPU of 0.93 cents from its financial results released Apr 20.
Despite the circumstances due to Covid-19 that led to KIT’s group revenue dropping 4% q-o-q to $406 million, the Trust managed to declare a steady distribution per unit (DPU) in 1Q2020, “in line with previous quarters”, said the report. This was due to the Trust’s sufficient cash buffer, as well as its other assets – including the Keppel Merlimau Cogen Plant (KMC) power plant – performing to full capacity.
However, the brokerage will be moderating its EBITDA – or earnings before interest, taxes, depreciation, and amortization – for FY20/21 by around “17% and 11% respectively, owing to the expected impact of the Covid-19 situation in Ixom in particular, including translation impact arising from a weaker Australian dollar,” says DBS analyst Suvro Sarkar.
Ixom’s revenue was also slightly lower seasonally due to a “sharp fall in caustic soda prices in FY19”. Demand would also be affected due to shutdowns in industries such as paper, pulp, and mining, which make up some of Ixom’s end-customers. That said, DBS feels the acquisition was a “step in the right direction” by KIT’s management, as Ixom, which is in the business of water treatment and chemical distribution in Australia and New Zealand, helps provide a much-needed diversification to KIT’s portfolio. “It diversifies the asset base, stabilises Net Asset Value (NAV) decline… and creates organic growth potential, which was largely missing till now,” says Sarkar.
“We believe there is room for yield compression to go below 7% levels once investors show renewed confidence in KIT’s credit profile and long-term cash flow sustainability,” he adds.
On the other hand, Basslink’s legal woes from 2018 that are due to be settled this year – over a six-month outage in 2016 – will not affect the Trust’s earnings.
“We expect 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,” says Sarkar.
On the whole, DBS takes a positive yet measured outlook to KIT’s FY20 revenue forecast, due to its sufficient cash flow and healthy balance sheet.
“With the divestment of its 51% stake in DC One to Keppel DC REIT in 4Q19, combined with the equity fund-raising (EFR) exercise and the perpetual securities issuance earlier in 2019, the Trust’s gearing profile further has improved significantly,” says Sarkar, noting that KIT’s net leverage had improved to “34% by end 1Q2020 from 41% at end FY18).
“This puts the Trust on a firm footing for the future. Even without raising new equity, the Trust can look to finance new acquisitions of around S$500m or more, given the debt headroom it now has,” he adds.
“We do not forecast any impact on distributions in FY20/21, and expect KIT to maintain [its] 3.72-cent annual distributions as any minor distributable cash flow shortfall can be smoothed out by drawing down gross cash reserves on its balance sheet, which amounted to around S$442m as of end 1Q19,” he concludes.
As at 1.13pm, units in KIT are down 0.5 cents or 1.042% at 47.5 cents.
