OCBC Investment Research analyst Ada Lim has initiated coverage on Keppel Infrastructure Trust A7RU (KIT) with a "buy" call and fair value estimate (or target price) of 60.5 cents.
To Lim, KIT’s portfolio of assets, which spans energy transition, environmental services and distribution and storage, are diversified and defensive as its assets are located in jurisdictions with well-developed legal frameworks.
In addition, many of KIT’s assets are backed by long-term concession agreements with more than 90% of its portfolio insulated against inflation due to cost pass-through mechanisms or strong price-setting capabilities.
“This translates to stable, recurring cash flows that are relatively unaffected by the ebbs and flows of the business cycle,” says Lim.
During the 1QFY2023 ended March 31, Lim notes that KIT reported a strong set of results driven by strong performances across all three of its business segments. Excluding one-off acquisition-related costs, KIT’s ebitda rose by 40.5% y-o-y to $125.9 million. The trust’s distributable income rose by 65.5% y-o-y to $73.9 million.
KIT is also an attractive proxy for the increase in infrastructure spending in Singapore and beyond. Global infrastructure spending is projected to reach US$9 trillion ($12.07 trillion) by 2025, she notes.
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In her view, acquisitions remain a key growth driver for the trust, which it is “well supported” by its experienced management team and ability to tap on the Keppel ecosystem.
In the FY2022 ended Dec 31, 2022, KIT made several “impressive” acquisitions, adding Aramco Gas Pipelines Company, EMK, and wind farm assets from Germany, Norway, and Sweden to its portfolio alongside three bolt-on acquisitions from Ixom. The acquisitions resulted in an increase in portfolio asset under management (AUM) to $6 billion as at Dec 31, 2022, 33.3% higher than the AUM of $4.5 billion as at Dec 31, 2021.
According to the independent third-party valuer engaged by KIT to conduct an inaugural revaluation of its portfolio, KIT’s enlarged portfolio AUM stood at $7.3 billion as at Dec 31, 2022.
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“While KIT is unable to book the revalued figure under the Singapore Financial Reporting Standards (SFRS), the exercise aims to provide more relevant and transparent asset values, which we think could be beneficial for when KIT taps into capital markets in the long run,” Lim notes.
To this end, the analyst is positive on KIT’s growth profile as its assets “provide exposure to long-term secular investment themes”.
“Most notably, KIT entered the renewable energy space with its maiden foray into Europe in FY2022, and aims to increase its investments in renewable energy from 10% to 25% of AUM by 2030. Through its subsidiary, City Energy, KIT is also growing the business of electric vehicle (EV) charging infrastructure, and forging partnerships to explore the development of a long-term sustainable supply chain of green hydrogen,” she writes.
“The continued improvement of KIT’s environmental, social and governance (ESG) credibility should bode well for its share price in the long run, given the policy support and increasing interest in sustainable investing,” she adds.
Though KIT’s ESG rating was downgraded in August 2022 due to a lack of disclosure on both its employee turnover rate and policies on executive compensation and employee grievance mechanisms, Lim points out that the trust has “robust initiatives” to reduce its carbon emissions.
“While its generation portfolio is more carbon intensive than peers due to its heavy reliance on natural gas, the company plans to halve emissions by 2030 (with 2020 as the baseline), and to achieve carbon neutrality by 2050. Additionally, KIT has plans to increase its investment in renewable energy by [around] 1.26 GW in the next five years,” she says.
All in all, Lim likes KIT as it is a defensive play amid heightened market volatility and a potential economic downturn. The trust will also benefit from the secular tailwind of rising infrastructure spending providing further support.
Units in KIT closed flat at 49 cents on June 19.
