SINGAPORE (Nov 27): UOB KayHian is upgrading Keppel Infrastructure Trust (KIT) to “buy” given the potential divestment of Basslink and the re-investment of proceeds.
A disposal will likely yield upside to unitholders as any asset acquired to replace Basslink will be DPU accretive to shareholders, says UOB.
“With total return -- including dividends -- of 16%, upgrade KIT to ‘buy’,” says analyst Foo Zhiwei.
KIT is undertaking a strategic review of Basslink. KIT has received a number of enquiries from parties expressing interest to acquire KIT’s 100% interest in Basslink. An undisclosed financial adviser has been appointed to assess market interest.
In a Nov 17 article in the Australian Financial Review, it was suggested the sale is very likely to happen due to political objectives.
While not an official stance, Australia’s Foreign Investment Review Board and the federal government’s Critical Infrastructure Centre (CIC) want to see Australian electricity and telecommunications assets remain in local hands.
As such, we believe a sale of Basslink to be an eventuality, says analyst Foo Zhiwei in a Monday report for retail investors.
However, it is unlikely the proceeds will be paid out to unitholders. Rather, the monies will likely be re-invested in DPUaccretive assets.
Given the competitive landscape for such assets, we will not be surprised if Keppel Infrastructure Trust turns towards less conventional assets or exercises its right of first refusal to acquire assets from sponsor, Keppel Infrastructure.
With Basslink’s value estimated at $750 million-$900 million, KIT can leverage up to three times the proceeds and attain a maximum acquisition size of $3.0-$3.6 billion.
Any acquisition post the divestment will likely be DPU accretive, given Basslink’s non-contribution to DPU until 2025.
UOB’s sensitivity analysis of KIT’s valuation shows upside for its share price for an acquisition even with 1% cash yield, assuming complete use of proceeds and maximum leverage.
This does not take into account the likely resultant higher DPU yield, which we estimate to rise from current 6.5% to 7.0%.
As at 11.53am, units in KIT are trading at 57.5 cents with FY18 dividend yield of 6.5%.
