During Keppel’s results briefing on Feb 1, group CFO Kevin Chng said that infrastructure is expected to be one of the fastest-growing asset classes. “We are in a strong position to build on the momentum, to capture the opportunities as an established infrastructure asset manager and operator,” he said.
A key cog in the wheel of Keppel as an asset manager and operator is one of its listed vehicles, Keppel Infrastructure Trust A7RU (KIT). Chng points out that Keppel’s operating income growth of $320 million was driven by higher net generation and margins from the integrated power business as well as a special distribution from KIT. Keppel owns 18.2% of KIT and Temasek Holdings has a deemed interest of 31.9% through a stake in Keppel.
Additionally, KIT can be an off-take vehicle for Keppel’s stabilised infrastructure assets. It owns 51% of the Keppel Merlimau Cogen and 100% of the Senoko Waste-to-Energy (WTE), Keppel Seghers Tuas WTE and Keppel Seghers Ulu Pandan NEWater plants. An asset in the pipeline is the Keppel Marina East desalination plant.
In its financial results for 3QFY2023 ended September 2023 which was announced on Nov 2, 2023, KIT unitholders received a special distribution of 2.33 cents as a result of the crystallisation of $131.2 million from the capital optimisation at Ixom. In FY2023, KIT’s distributable income increased 42.4% y-o-y to $316.8 million, supported by the crystallisation of $131.2 million from the capital optimisation of Ixom.
DPU boosted by special distribution
Including the special distribution of 2.33 cents per unit, total distributions per unit (DPU) for FY2023 rose 62% to 6.19 cents. Excluding the special distribution, KIT’s DPU would see a steady increase of 1% to 3.86 cents for the year.
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Kevin Neo, CEO of KIT’s trustee-manager, says there are a few sources of special distributions: “If we sell an asset and we realise a gain, we will share that with investors through a special distribution while keeping the rest for reinvestment. Secondly, we have a focus on really growing the business and increasing the business such that we can undertake a capital optimisation of the asset which will release cash from the business.”
In FY2023, revenue from Ixom fell due to lower contract manufacturing volumes, a slowdown in consumer discretionary spending and weaker Australian dollar (AUD) exchange rates used to translate Ixom’s AUD-denominated revenue.
However, KIT’s manager also points out that “Ixom’s growth remains robust with an adjusted ebitda of $186.6 million (A$209.2 million) in FY2023 due to strong volumes and pricing of its chemical products in Australia; increased volume from the industrial and diary segments in New Zealand, and contribution from its new bolt-on acquisitions.”
See also: KIT’s trustee-manager announces second EFR within a year, says EGM resolutions are DPU-accretive
The capital optimisation occurred because of Ixom’s higher valuation when KIT completed the early refinancing of its loan facility by the end of July 2023.
“We don’t have a target payout ratio of our cash earnings. Based on our historical track record, we aim to grow our DPU in a very sustainable manner, at 1% to 2% annually. We will look to make a special distribution if we crystallise the value of any asset,” Neo says.
He adds that as a business trust, KIT pays its DPU out of cash flow and not from retained earnings. Hence the way to look at valuing KIT isn’t through its net asset value (NAV). Being a business trust, KIT is governed by the Business Trust Act 2004 that allows it to pay distributions to unitholders out of its cash balance and residual cash flows, based on its distribution policy.
Eric Ng, CFO of KIT’s trustee-manager, explains: “We are a business trust, we are allowed to pay a distribution of retained cash. That will result in a reduction of NAV. When we do capital recycling, we can recognise the intrinsic value of the assets that can be sold for the benefit of the unitholders. And when we do that, from an accounting point of view, the gain from recycling is recognised because there’s a transaction that would increase the profit of KIT and reduce the accumulated loss. That’s part of the overall strategy that we are trying to do to show that NAV can increase with growth and recycling.”
“This is what the trustee-manager has done in the last five years. And we want to continue to provide that source of steady distribution. On and off, we create events that will be booked as capital gain to the unitholders,” Ng adds.
What is in KIT?
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KIT’s revenue contributors are classified under three main divisions: Energy Transition, Environmental Services, and Distribution and Storage. The famed Ixom is part of this third division. (See Table 1)
The assets in the energy transition division are stakes in City Energy, Keppel Merlimau Cogen (KMC), Aramco Gas Pipelines Company (AGPC) and wind farms in Europe.
City Energy is the sole supplier of town gas in Singapore and a supplier of electric vehicle charging solutions. KMC provides stable cash flows as a function of availability while AGPC holds a 20-year lease and leaseback agreement which started in February 2022. Under environmental services, the WTE projects generate stable cash flows as a function of availability.
A second reason KIT is important is its contributions to Keppel’s fee income. Christina Tan, CEO, fund management and chief investment officer, Keppel, says there were fees attached to KIT’s 2.33 cents special distribution.
In 2022, KIT announced a change in its fee structure which was voted through in an EGM. The original base fee of $2 million a year was changed to 10% per annum of KIT’s distributable income. The performance fee of 4.5% of cash inflows received by KIT from subsidiaries, associates, sub-trusts and its investments was changed to 25% of DPU growth.
Hence, in FY2023, when KIT’s unitholders paid the full new fee, the base fee was no longer $2 million but $37.3 million (See Table 2 on Page 14) and the new performance fee was no longer $4.8 million but $27 million.
Arguably, the new fee structure shows more alignment between the trustee-manager and unitholders because the trustee-manager will be incentivised to grow DPU. In addition to base and performance fees, KIT’s unitholders pay acquisition fees. Interestingly, in 2022, to offset the lower base and performance fees, KIT reported $27 million in acquisition fees. In 2023, acquisition fees were a mere $184,000. As a result, total fees paid in 2023 showed only 16% y-o-y growth.
On the capital management front, KIT’s gearing stood at 39.9% as at the end of December 2023. The strategy is to limit gearing levels to 45% even though business trusts have no gearing cap. The gearing levels provide a debt headroom of around $549 million. To mitigate against rising interest rates, approximately 83% of KIT’s total loans are fixed and hedged as at Dec 31, 2023.
Acquisitions
On Feb 5, KIT announced the acquisition of Ventura, the largest bus service business in Victoria, Australia, for an enterprise value of A$600 million ($540 million). As part of the outlay, there is an estimated cash amount of A$328.2 million. An earnout of A$20 million will be provided. According to a recent report by OCBC Investment Research, the acquisition is likely to be accretive despite the overhang of an equity fundraising exercise.
For the time being, according to the OCBC report, KIT has assumed that $178.8 million or 31.3% will be funded through debt while the remaining $391.8 million (68.7%) will be funded through the issuance of 849.3 million new units in an equity fundraising (EFR).
OCBC Investment Research says: “After factoring in the dilution from the EFR, the acquisition is still expected to be accretive, with FY2023 DPU increasing by 3.4% from 3.86 cents (excluding special distribution) 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.”
The synergy of the bus business within KIT or Keppel has yet to be seen but Ventura’s bus fleet includes 27 zero-emission buses.
On Feb 1, during a results briefing, Keppel’s group CEO Loh Chin Hua highlighted examples of close cooperation between KIT and Keppel. “Through the good work done by KIT and also its sponsor, our infrastructure division, we were able to work with the National Environment Agency (NEA) to extend the contract for Senoko.”
Loh is referring to the extension granted by the NEA to the Senoko WTE plant for three years with an option to further extend by another year. “The concession was coming to an end. I think it clearly shows that we can work in a situation where we are creating value for the unitholders of KIT. It is also good for Keppel shareholders because we will earn fees as well for the infrastructure division as well as our asset management arm. At the same time, we are also an investor and we have shares in KIT, so we will also benefit as a unitholder,” Loh adds.
In FY2023, Keppel’s net profit from infrastructure of $699 million was the largest contributor to the group’s net profit from continuing operations of $885 million. Partly, the high energy prices and better margins in 1HFY2023 are unlikely to be repeated this year. However, Keppel has signed longer-term contracts of one to three years to provide some stability to earnings.
Additionally, in January, GlobalFoundries and Keppel signed a multi-year PPA (power purchase agreement) for the provision of electricity to GlobalFoundries starting May 1. GlobalFoundries will also be a major off-taker from the Keppel Sakra Cogen Plant when it is operational in 2026. This plant is designed to be able to co-fire with 30% hydrogen content and is capable of making the switch to operate entirely on hydrogen.
CEO Neo says being part of the Keppel group is an advantage. “We have a dedicated portfolio management and optimisation team that will focus on [working] assets harder, improving their performance, business optimisation and realising bigger synergies through leveraging the deep engineering capabilities and network of the Keppel Group. We have a clear advantage of being able to draw on both strong development and engineering capabilities and track record as demonstrated over the past years. We look to expand on this collaboration further.”
Keppel’s involvement in various infrastructure projects such as the Bifrost Trans-Pacific Cable System and other projects provides a pipeline for KIT.
When asked what assets are of interest to KIT, Neo says these include fibre networks, subsea cables, cabling networks and cabling vessels. “We like businesses that provide a promising growth path, where we can add value, increase synergies and ultimately unlock value. If executed successfully, the strategy will allow us to create a multiplier effect, to recycle capital to deliver greater returns to our unitholders for years to come.”
