SINGAPORE (Oct 18): DBS Vickers Securities is maintaining its “buy” call on Keppel Infrastructure Trust (KIT) with a 58-cent price target after the trust’s latest reported DPU of 0.93 cent for 3Q came in line with expectations.
At its Tuesday closing price of 49.5 cents, the trust is trading at a yield of about 7.5% according to DBS estimates, which the research house deems to provide a good entry point for investors amid current market volatility.
In a Wednesday report, analyst Sukro Sarkar says he believes KIT is sufficiently protected from the ongoing troubles of its subsidiary Basslink as it faces demands from the State of Tasmania for indemnification to over A$100 million for losses incurred from a 2016 Basslink outage incident.
“While Basslink has referred the dispute to arbitration, even in the worst case scenario, KIT will not be liable to pay any damages as any claims against Basslink are ring-fenced at the Basslink level,” explains Sarkar.
“In any case, KIT does not depend on cash flows from Basslink for current distributions, and project loans are also non-recourse to KIT. We ascribe zero value to Basslink in our valuations for KIT, hence the negative newsflow from Basslink is an irritant at best and does not affect fundamentals for KIT.”
Going forward, the analyst is positive on KIT’s M&A ambitions in the near-to-medium term under the leadership of its new CEO. This includes the trust’s intended acquisitions of an Australian chemical distribution company, which Sarkar highlights could be worth more than US$1 billion according to media reports.
“Key risks include plants not meeting availability thresholds owing to operating issues, increasing debt refinancing risks for the asset portfolio as the assets age, and exposure to increases in inflation and interest rates,” cautions Sarkar.
As at 10:52am, units in KIT are trading flat at 49 cents or 1.88 times FY18F P/BV.
