OCBC Investment Research analyst Ada Lim has maintained her “buy” call on Keppel Infrastructure Trust A7RU (KIT) with a fair value estimate of 59.5 cents after the trust announced that it is acquiring the largest bus service provider in Victoria, Australia, Ventura Motors, for A$600 million.
The acquisition will likely be funded through a combination of internal resources, debt, and equity. Lim notes that KIT could potentially list an additional 1.06 billion new units for net proceeds of up to $490.4 million via a private placement or preferential offering.
For illustrative purposes, the trust has assumed $178.8 million or 31.3% of total acquisition cost. The remaining $391.8 million (68.7%) will be funded through the issuance of about 849.3 million new units, Lim highlights.
“After factoring in the dilution from the equity fund raising, the acquisition is still expected to be accretive, with FY2023 distribution per unit (DPU) increasing by 3.4% from 3.86 cents to 3.99 cents on a pro forma basis.
“Assuming that the acquisition had been completed on Dec 31, 2023, net gearing would have been lowered from 39.9% to 39.2% given that Ventura has a lower gearing level than the trust, while net asset value (NAV) per unit would have increased from 15.5 cents to 19.2 cents,” adds Lim.
She points out that the cash flows from Ventura’s public bus business are expected to be stable and defensive. Ventura earns a service delivery cost plus a fixed margin from its government contracts. While there could be some timing differences, the costs of running the business should eventually be passed on to the Victorian government, given that contract payments are indexed to relevant inflation indices.
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents
Ventura may also enjoy further upside in the form of incentive payments if certain performance targets are achieved — KIT’s management shared that it has largely outperformed since contract inception. Additionally, Ventura receives capital reimbursements for the capital expenditure on fleet acquisitions and depot upgrades, Lim notes.
“KIT deems the Victorian mass transport space as attractive with an addressable market that is expected to expand at a cumulative average growth rate (CAGR) of 4.5% from FY2023 to FY2029, backed by rapid population growth and significant transport infrastructure investments by the Victorian government.
“In particular, KIT sees potential opportunities to electrify Ventura’s business, tapping on the broader expertise of the Keppel ecosystem, or to explore bolt-on acquisitions that expand Ventura’s footprint both within and outside Melbourne.”
See also: Suntec REIT biggest beneficiary from MAS’s ‘looser’ leverage, ICR rules: OCBC
Lim leaves her estimates unchanged, pending further details to the timeline, quantum and composition of funding for the transaction.
As at 11.29am, units in KIT are trading 1.5 cents lower or 2.97% down at 49 cents.
