The first of Keppel Infrastructure Trust A7RU ’s three resolutions tabled at an EGM on April 21 required a moment of head scratching. Resolution 1 is to ask unitholders’ permission for an equity fund raising. Resolutions 2 and 3 are around interested party transactions. These resolutions are on the back of an acquisition, Ventura Motors and amendment of an important contract at Keppel Merlimau Cogen. Both are likely to boost DPU significantly according to a KIT circular dated April 1.
Resolution 1 to for the proposed issuance of up to 1,061.6 million new units in KIT, representing around 18.9% of units outstanding via a placement and preferential offering. Last month, KIT’s trustee-manager announced the proposed acquisition of Ventura Motors, a transportation company in Victoria, for the equivalent of $570.6 million.
"Whilst the Trustee-Manager can, the Trustee-Manager will not be relying on the general mandate to issue the new units. Unitholders’ approval is sought for the Proposed Keppe infrastructure Holdings (KIHPL) Placement because KIHPL is a substantial Unitholder and under Rule 812 of the Listing Manual “an issue must not be placed to, among others, an issuer’s substantial shareholders unless specific shareholders’ approval has been obtained for such placement”, as well as KIHPL is deemed to be an interested person for the purposes of Chapter 9 of the Listing Manual," a Keppel spokesperson says.
The EFR announced on April 1 is likely to be the second equity fund raising within a year. In May 2023, KIT’s manager raised around $300 million via 383.6 million units in a placement and an additional 417.2 million units in a preferential offer.
Under these conditions, the acquisition of Ventura is likely to be 3.4% accretive to FY2023’s DPU, excluding the 2.33 cents that KIT unitholders were rewarded with in November 2023.
The total cost of $570.6 million comprises the estimated purchase of A$328.2 million (approximately $295.3 million), the existing loans taken up by the Ventura Group of the estimated amount of A$269.3 million (approximately $242.4 million) which will be paid down at completion, and fees and expenses.
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In KIT’s circular dated Apr 1, the expected equity fund raising is expected to amount to $490.4 million, but the trust can raise no more than $500 million based on the maximum number of units of 1,061.57 million, if priced at $0.471.
The pro forma financial effect of the Ventura Motors purchase, announced in February, assumes that KIT raises $391.9 million from the issuance of 849.3 million units in the EFR (the issue price of the new units will be announced nearer the launch date).
How valuable is Ventura?
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Ventura is registered in Victoria, Australia and has an issued and paid-up share capital of 1,046,353 ordinary shares. Based on the audited accounts of the Ventura Group for the financial year ended June 30, 2023, the book value and the net tangible liabilities value of the Ventura Group were approximately A$58.0 million (approximately $52.2 million) and A$76.0 million (approximately $68.4 million), respectively, and the net income attributable to the Ventura Group for the financial year FY2023 was approximately A$8.4 million (approximately $7.6 million).
According to KIT’s Apr 1 circular, over 80% of Ventura’s revenues are derived from long-term government contracts, which provide stable, inflation-protected revenues that do not fluctuate with the volume of passengers or fares collected. In addition to operating government route services, Ventura also provides bus services in Victoria, servicing about 150 private and public schools, as well as providing bus services for regional areas, tourism destinations, and general charter.
A large majority (over 80%) of Ventura’s revenues are derived from the Metropolitan Bus Service Contracts, which are long-term (8+2 years), inflation-protected government contracts. These contracts were entered into in 2018 for eight years till 2026, with an automatic two-year extension up to 2028 if certain key performance measures are met. Ventura has met the performance measures required to secure the extension, and the probability of further extensions is high given Ventura’s strong emphasis of safety and compliance. These contracts do not fluctuate with the volume of passengers or fares collected.
Revenues are negotiated with the government at contract inception and are based on an estimate of service delivery costs plus a fixed margin, then periodically indexed at relevant benchmarks (such as CPI, fuel index, labour index). Hence, the revenues paid are resilient through the cycle and provides stable Ebitda and cash flows with performance incentives.
Additionally, Ventura is reimbursed for capital expenditures on fleet acquisitions and depots over time under the Metropolitan Bus Services Contract. The reimbursement for fleets capital expenditures includes the estimated financing costs associated with the fleet purchase and the depot capital expenditures are reimbursed via an access payment in exchange for the usage of the depots.
Keppel Merlimau Cogen’s capital restructure boosts KIT’s DPU
Resolution 2 is for the proposed issuance of placement units to Keppel Infrastructure Holdings (KIHPL); and resolution 3 is to approve the restructuring of Keppel Merlimau Cogen debt and service agreements.
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Resolution 2 is for KIHPL to subscribe to the placement units such that it’s stake of 18.21% in KIT is maintained. The proposed placement to KIHPL is also subject to approval from Keppel’s shareholders.
Resolution 3 revolves around Keppel Merlimau Cogen, jointly owned by KIT (51%) and Keppel Infrastructure Holdings (49%).
KIHPL and KIT are proposing to amend and extend the Capacity Tolling Agreement or CTA for Keppel Merlimau Cogen for 10 years, from 2030 to 2040. If this is approved, the contracted cashflows will generate up to $1.08 billion in capacity payments for the plant over the period, allow the existing loan on the plant to be restructured, and distributions from Keppel Merlimau Cogen to KIT to resume.
Under the new CTA, the maximum Capacity Fee that KMC will receive is $108 million a year as long as KMC meets the availability and capacity test targets.
The new CTA, coupled with the restructuring and refinancing of KMC’s amortising loan would unlock value for KMC and enable it to resume distributions to KIT. According to the circular, the new structure boost KIT’s pro forma DPU by 11% to 4.28 cents from 3.86 cents (excluding the special distribution in November last year).
