DBS Group Research’s Suvro Sakar has maintained his “buy” call and raised his target price on Keppel Infrastructure Trust (KIT) from 60 cents to 63 cents.
Sarkar notes that KIT has completed or announced a significant line-up of deals so far in 2022, which, in his view “should be DPU accretive unlike in the past.”
He points at projects that include entry into the renewable energy space as well, which should boost KIT’s environmental, social and governance (ESG) credentials.
KIT has recently proposed its maiden investment in the renewable energy space, in tier 1 markets in Europe, committing up to EUR160 million ($233.6 million) investments through an 82:18 joint venture with Keppel Renewable.
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The strategic review of Ixom, currently underway, should also help KIT lock in material divestment gains next year and redeploy proceeds to boost cash flows further.
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Notably, KIT’s distributions are largely not affected by economic cycles, which is “a rarity” compared to the Singapore REITs (S-REITs) space. KIT’s portfolio comprises critical infrastructure assets, which are not impacted by the pandemic or economic downturns.
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Sarkar says that high fuel prices may affect the timing of cash flows at City Energy (formerly City Gas) but otherwise, cash flows are highly predictable.
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Exposure to interest rate hikes is also minimal, and he notes that despite the fact that borrowings have increased in 1HFY2022 to fund acquisitions, and net gearing is up to 31.2% from 22% at end-FY2021, “this is still a very reasonable level and implies a $700 million headroom before gearing hits 45% level, which is the S-REIT benchmark.”
Of course, he says that business trusts like KIT have no regulatory limit and can lever up more, if required, and its net debt to EBITDA ratio of 4.2x is also “no cause for concern.”
KIT’s weighted average interest rate right now is around 2.5%, and weighted average term to maturity of loans is 3.2 years.
Sarkar also highlights that KIT has hedged about 90% of its loans. With a 90% hedge in place, a 100 basis points change in interest rate would have around a 1% impact on distributable income, according to management estimates.
“Thus, we could expect 1% - 2% impact or about [a] $2 million - $4 million impact to distributable income per annum from increasing interest rates, which would not be material,” Sarkar thinks.
Furthermore, he believes that KIT is sufficiently protected from the troubles at its Australian subsidiary Basslink.
Basslink went into insolvency late last year, and Sarkar notes that any claims against Basslink are ring-fenced at the Basslink level.
He adds that Basslink has been de-consolidated from KIT financials and management believes there are no contingent liabilities outstanding related to Basslink.
“Given a steady delivery of DPU increases, a low impact from high-interest rate environment, Basslink concerns mostly behind us, and chances of further DPU accretion in the near to medium term future on the back of inorganic growth, KIT, with a yield of 6.6% at current prices, promises to be a more exciting story in the times to come.” Sarkar concludes.
