On Nov 2, Keppel Infrastructure Trust A7RU (KIT) announced capital optimisation of $273 million from the growth of Ixom and City Energy during its 3QFY2023 results for the three months to Sept 30. Ixom has a September year end. The capital optimisation came on the back of better performances for Ixom and City Energy.
Since acquiring Ixom in 2019, its Ebitda has grown by 52%, KIT points out in its presentation. Since being rebranded in 2021, City Energy’s Ebitda is up by 30%.
Of the $273 million in equity from the capital optimisation, 48% or $131 million was used to pay a special distribution to unitholders, and $142 million was used to partially fund the FY2022 acquisitions. Interestingly, the growth in distributable income for the nine months to September 30 was $26.97 million or 14.7 %y-o-y, compared with the one-time boost of $131 million from the capital optimisation.
Acquisitions made in FY2022 include two wind farm acquisitions in Europe, namely an offshore wind farm in Germany, as well as a European onshore wind platform comprising three assets across Norway and Sweden. These two acquisitions were jointly made with Keppel Corporation BN4 . In February 2022, KIT invested the equivalent of $336.08 million in the Aramco Gas Pipelines. In addition, KIT and Keppel Asia Infrastructure Fund together acquired Eco Management Korea (EMK), one of the leading integrated waste management platforms in South Korea.
In Singapore, KIT completed the acquisition of the remaining 30% stake in SingSpring Desalination Plant. KIT’s trustee-manager has also signed a non-binding term sheet with Keppel Infrastructure to acquire the Keppel Marina East Desalination Plant (KMEDP), Singapore’s first and only large-scale dual mode plant, which can treat seawater or rainwater drawn from the Marina Reservoir.
In April this year, KIT upsized a placement from $125 million to $183 million. Together with a preferential equity fund raising (EFR), KIT raised some $300 million to partly fund the European wind farms and EMK.
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In April 2022, KIT’s unitholders voted overwhelmingly for a change in the fee structure. Previously, KIT’s base fee was just $2.5 million a year, while its performance fee was based on 4.5% of the trust’s income.
From 2H2022 onwards, the base fee was changed to 10% of distributable income while the performance fee was changed based on 25% of DPU growth. There is no change in acquisition and divestment fees.
In for the nine months to Sept 30, distributable income surged by 93% to $266.07 million, partly due to the new acquisitions, but mainly due to the capital optimisation. Because of the special distribution of 2.33 cents in 3QFY2023 – which was many times more than DPU of 0.97 cents for the quarter – DPU for the first nine months of the year has surged by 82% y-o-y to 5.23 cents.
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Hence, underpinned by acquisitions and capital optimisation, KIT’s distributable income and DPU growth point to a windfall in fees for KIT’s sponsor.
According to last year’s circular justifying the higher fees, the new fee structure will align fee structure with long-term value creation; it will also align interests of unitholders with that of the trustee-manager and sponsor, and it will help to drive further portfolio growth through new investments, the KIT circular argues.
DBS Group Research expects this year to be a “blow-out” year for DPU. “Full-year FY2023 DPU of around 6.20 cents compares to 3.82 cents in DPU last year,” DBS says.
According to DBS, despite some one-offs in 3Q2023, like refinancing fees, higher capex and taxes, a weaker AUD at Ixom and lower availability fees at the Senoko wastewater plant, “cash flow generation continued to be robust overall in 9M23, driven by the acquisitions completed in FY2022”.
Although KIT’s trustee-manager has had two swift changes of CEO, DBS reckons that the new management team is likely to better reward unitholders “based on the strength in the earnings and valuations of its underlying portfolio”.
“While this level of special distributions cannot be expected on a regular basis, management indicated that this is not a one-off and efforts will be made to share the proceeds of “capital optimisation” with unitholders from time to time. This means there could be an upside to our base case distribution forecasts hereon,” DBS says.
Some unitholders are clearly not happy with the way that KIT’s trustee-manager is announcing DPU, pointing out that KIT raised equity this year. Subsequently, KIT raised further equity through its capital optimisation which one unitholder assumes it took on more debt. And now, KIT is paying out a special distribution, in time to boost its fee income, unitholders gripe.
