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Keppel Infrastructure Trust’s Operating Challenge

Someone in the financial independence chat asked whether I could make an analysis on Keppel Infrastructure Trust (KIT).

I think there is not much changes or novelty for me to do an analysis on the stock but I could share some of my thoughts about it.

Keppel Infrastructure Trust is structured as a Business Trust. It also gives a good dividend. Currently, it pays $0.0093 a quarter. This works out to be 7.5% dividend yield based on the traded price of $0.495.

Keppel infrastructure trust was formed through the merger of two utility-like companies Cityspring Trust and K-Green trust. Back then, both trust needed each other. K-green do not have debt but the portfolio is made up of utility concession that is rather short. Cityspring is leveraged, has a problem holding in Basslink.

A combination gives it to size, reduces the leverage and more bandwidth to rejuvenate itself. As part of the merger, the combined entity acquire KMC.

Since then, they have acquired Australian supplier and distributor of water treatment chemicals, industrial and specialty chemicals IXOM. You can read about my thoughts about the acquisition here.

I like the idea of Keppel Infrastructure trust as an investment. It is not going to be a stupdenous investment, but as a dividend investor, I like the recurring nature of the cash flow.

However, there are two things that prevented me from pulling the trigger.

  1. Not sure how consistent is this cash flow. It is pretty hard to detect from the financials due to the special nature of each asset.
  2. Senoko Waste-to-energy plant, Keppel Seghers Ulu Pandan NEWWater Plant, and SingSpring Desalination Plant on average have 10 years of concession left. These formed 40% of the cash flow needed to generate the dividend.

The inconsistent cash flow is a bit relative. We are not gonna expect cash flow to be in lock step. I was just wondering just how consistent. This is especially so when they purchase IXOM.

IXOM feels like an operation business. Yes some businesses are always in demand and IXOM basically serves the utility backbone of Australian companies. If their clients are recurring and there ain’t much advantage if they switch from one chemical provider to another, then it should be pretty recurring.

The table below shows the quarter by quarter distributable cash flows of Keppel Infrastructure Trust’s individual assets.

I think we only manage to see 1 year of IXOM’s contribution so I am not sure if the cash flows are seasonal. The cash flow of a few assets depend on KIT’s availability fulfillment.

I think I can live with some of the questions over the consistency of cash flows.

To pay the $0.0093 quarterly dividend, they would need $43 million in distributable cash flows.

Somehow, it is a bit unassuring that 40% of the cash flow will expire in 10 years time.

I dug out a seriously old Investment Moats post where I asked the K-Green Trust’s IR whether my interpretation of the concession is correct. The way they evade giving me a straight forward answer that after 15-25 years, the value of the assets is effectively zero is telling.

If KIT pays out all the distributable cash flows, they cannot replenish this 50% of their portfolio. If this is a traditional utility company, paying out only from earnings, or even free cash flows, they could retain enough money to acquire greenfield or brownfield assets to replenish these short concessions.

This is what we are seeing in the toll roads. They only pay out a portion of earnings. The cash flow can yield 16-20% but they only pay out 8%. They are under no illusion that they have to conserve cash flow and buy younger roads.

Keppel Infrastructure Trust’s balance sheet currently looks like this:

  1. Total Assets: $5 billion
  2. Cash: $470 million
  3. Total Debt (Exclude Basslink debt): $2.1 billion
  4. Perpetuals: $300 million
  5. Net debt to asset: 36%
  6. Perpetuals as a percentage of Equity: 17.6%

I think they can levered up and purchase something that allows them to make up for that loss of concession.

For example, I played around with the numbers, and I think they can acquire some stuff that comes up to:

  1. Return on Asset: 6%
  2. Effective interest: 3% (big step down on the current 4.5% average)
  3. Perpetual Interest: 3.75% (big step down on their current 4.7% perpetual securities)
  4. Purchase $2.1 billion of assets that provides a distributable cash flow
  5. Finance with $470 million in cash, $1.4 billion in additional debt, $200 mil in additional perpetual securities
  6. This will generate $126 mil in gross cash inflow. After additional interest expense of $42 mil and additional perpetual dividends of $7.5 mil, that will generate $76.5 mil.
  7. This will take net debt to asset to 49%.

I think is damn hard to replace KMC, Waste & Water totally but they got to try over time. Perhaps there needs a rights issue.

Don’t take my numbers super seriously. The thought process might not be super thorough.

The asset value will keep going down.

The Waste & Water service concession goes down by $50 million a year and in 5 years that will be gone. From what I see KMC’s PPE also goes down like $60 million a year.

But they better buy some longer running utility.

Perhaps in this period, there are some attractive assets that would present itself to Keppel Infrastructure Trust.

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KC Chan

Wednesday 6th of May 2020

Hi Kyith Thanks for your article of KIT.

The question is after the concession agreements expire can they be renewed for another period of time and hence help KIT to maintain its cash flow. I don’t really know the business model for this type of business. Perhaps you have some thoughts here.

I took a look at the 2019 financial statements and you are right with regards to the falling NAV for these concession assets.

My understanding from Note 13 f their FS ( I may be wrong) is that the total revenue from the concessions ( over the duration of entire agreement) are reported in the balance sheet and recognised as revenue in the P/L over the duration of the agreement as and when the services are performed. At the end of the concession agreement the Design Build ,Own and Operate (DBOO) plants are returned to the government.. Every year the NAV of these concession assets are decreasing until they reach zero at the end of the concession period.


Thursday 7th of May 2020

Hi KC Chan, that is my understanding as well. The only mistake I made in my article, was that perhaps KMC concession and land lease is longer. This gives KIT more room to manuever.


Tuesday 5th of May 2020

Dear Kyith,

I refer to the following artilce on KIT which is kind of saying the opposite of what you are saying regarding the concession expiring leading to the business being 0 value.

"Unlike infrastructure assets that are concession-based, evergreen businesses have the potential for growth due to demand factors that help the business stay relevant. They do not have an end life, and there is also a constant need for their products – people don’t stop eating or drinking just because the economy is not doing well. This gives rise to long-term cash flows that are defensive.

With such long-term and defensive cash flows, KIT has been paying out stable distributions to its unitholders. Its quarterly distribution of 0.93 Singapore cents has remained unchanged since 2Q 2015. This translates into an estimated distribution yield of 7% (based on 17 December 2019’s closing price), which has further upside given the growth potential of Ixom and City Gas."

Can you comment on that?

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