Beansprout, an investment advisory platform, has initiated “buy” on Keppel Infrastructure Trust A7RU (KIT).
In her report dated June 13, analyst Peggy Mak likes the trust for its resilient assets that support its “attractive” yield.
“KIT invests in infrastructure assets that provide stable cashflows in developed markets. It offers an attractive distribution yield of 8.5% for FY2024,” Mak writes.
Within its portfolio, about 65% of KIT’s revenue is linked to the consumer price index (CPI) with cost pass-through. Its assets under management (AUM) reached $8.7 billion as at the end of March this year, she adds.
Mak also notes that KIT’s distribution per unit (DPU) is expected to rise in the next two years thanks to the resumption of distribution from Keppel Merlimau Cogen Plant. Contributions from the 45% stake in a solar portfolio from German renewable energy company, Enpal, as well as contributions from Ventura Bus operations in Victoria, Australia from the 2HFY2024, are also expected to lift KIT’s DPU.
KIT announced on June 3 that it had completed the acquisition of the 97.68% stake in the transport company. This is excluding the one-off dividend of 2.33 cents that KIT paid out in the FY2023 with its City Energy and Ixom assets returning $131 million of cash to unitholders.
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Over the last three years, however, KIT’s DPU already showed growth, at a compound annual growth rate (CAGR) of 18.5%. Drivers to DPU growth were cash flows from KIT’s newly-acquired assets and stronger earnings from its existing assets, says Mak.
At present, the analyst sees that the trust is unlikely to conduct an equity fund raising (EFR).
For its acquisition of Ventura Motors, KIT financed the acquisition with a 15-month bridging loan.
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“[KIT] has the option to fund this with new equity, since unitholders have given their approval for raising up to $500 million through private placements and/or non-renounceable preferential offerings,” says Mak.
“But at the current share price, we estimate equity yields of 8.5% for FY2024, and 8.9% for FY2025. This makes equity fund raising less compelling than debt,” she adds.
KIT’s net gearing as at the end of March stood at 41.1%. Its total debt to total assets stood at 48.6%, well below the bank covenants.
Meanwhile, average cost of debt inched up by 0.12 percentage points q-o-q to 4.37% in the 1QFY2024. This may increase further as some lower-cost hedges roll off, Mak points out.
At her target price, KIT’s distribution yield is at 6.6% for the FY2024 and 6.9% for FY2025.
In her view, interest rates and a strong Singapore dollar (SGD) are key risks.
“If interest rates stay high, higher cost of debt could lower cash flows derived from the assets. Higher rates will also lift required returns from new investments. This limits the scope for new investments. A strong SGD versus the Australian dollar (AUD), Euro and USD would also lower cash flow received from overseas entities,” she writes.
Units in KIT closed 0.5 cents lower or 1.09% down at 45.5 cents on June 14.
