$Kep Infra Tr (A7RU.SG)$ $Kep Infra Tr(A7RU.SI) ...DBS, 3/11...
$Kep Infra Tr(A7RU.SI) ...DBS, 3/11/2023
03 Nov 2023
Makes a statement under new CEO with special dividend bonanza
- Special distribution of 2.33Scts in 3Q23 catches us by surprise; represents 7.5% return in near term when combined with base distribution of 0.97Scts for 3Q23
- Special distribution is driven by successful value creation at key assets like Ixom and CityEnergy, which enabled management to upsize credit facilities on refinancing and share part of these capital optimisation proceeds with unitholders
- Business model remains largely recession proof and inflation proof; credit metrics healthy
- Recent share price weakness overdone in our view; Maintain BUY with TP of S$0.57
9M23 highlights: Special distribution a positive surprise
KIT departed from recent tradition (semi-annual reporting and distributions) under new CEO Mr. Kevin Neo (replacing Mr. Jopy Chiang) and not only reported 3Q results and steady 3Q23 distributions (0.97Scts), but also took us by surprise by announcing a special dividend of 2.33Scts for the quarter to reward long time unitholders. Total 3Q23 DPU (ex-date: 9 Nov’23 and pay date: 20 Nov’23) would thus be around 3.30Scts (handy 7.5% yield for just one quarter) and 9M23 DPU will be around 5.23Scts, implying full year FY23 DPU of around 6.20Scts or 14% dividend yield at current prices. This compares to 3.82Scts DPU last year in FY22, which was slightly above the stable baseline DPU of 3.72Scts that KIT had paid out on legacy basis from FY15-20 – FY23 distributions will thus represent a blowout year for unitholders who have patiently stayed with KIT.
Thoughts and Outlook
Despite the presence of some one-offs in 3Q23 like refinancing fees, higher capex and taxes and a weaker AUD at Ixom and lower availability fees at Senoko wastewater plant, cash flow generation continued to be robust overall in 9M23, driven by the acquisitions completed in FY22, which was a very eventful year for KIT in terms of growing its portfolio. Under the new management team, we could be in for more excitement hereon, evidenced by moves to reward unitholders better on the basis of strength in underlying portfolio earnings and valuations. While this level of special distributions cannot be expected on a regular basis, management indicated that this is not a one-off and efforts will be made to share the proceeds of “capital optimisation” with unitholders from time to time. This means there could be upside to our base case distribution forecasts hereon. The Trust is currently trading at around 9% yield (ex-special distributions) with share price having retreated from S$0.52 to S$0.44 over the last 3-odd months, in line with interest rate hikes affecting market sentiment and closest comparable S-REIT sector declining as well. However, unlike many S-REITS, the Trust has limited exposure to economic cycles, counterparty issues, energy inflation or interest rate increases, so we believe share price has been over penalised and represents a great opportunity to accumulate, given a more dynamic management stance towards DPU growth. Maintain BUY with a DDM-based TP of S$0.57 (implied 7% target yield).
In terms of financials, KIT recorded S$266.1m in distributable income (DI) for 9M23, up 93% y-o-y, but this was made possible by addition of “capital optimisation” proceeds of S$131.2m to the DI for the 3rd quarter, which pays for the special dividend. Excluding these proceeds and corporate expenses, asset level cash flows were up 14.7% y-o-y in 9M23, driven by contribution from new acquisitions completed in FY22; EBITDA was up 28% y-o-y in 9M23. What is the “capital optimisation?” - essentially this is part crystallisation of the value created by KIT management from growing EBITDA at Ixom and CityGas, which has enabled the Trust to refinance borrowings with upsized credit facilities on the back of much stronger EBITDA levels. The capital optimisation concluded this year has yielded S$273m in funds for the Trust, part of which (S$142m) has been earlier used to pay down bridge loans taken to fund acquisitions completed in FY22, and the remaining S$131m is now being used to fund the special distribution for unitholders. We believe the timing of the special distribution ties in with the successful refinancing completed at Ixom level recently, where we have seen 52% growth in EBITDA from FY19-23 driven by organic and inorganic factors, which has allowed the Trust to optimise capital structure there and share some of the gains with unitholders.
03 Nov 2023
Makes a statement under new CEO with special dividend bonanza
- Special distribution of 2.33Scts in 3Q23 catches us by surprise; represents 7.5% return in near term when combined with base distribution of 0.97Scts for 3Q23
- Special distribution is driven by successful value creation at key assets like Ixom and CityEnergy, which enabled management to upsize credit facilities on refinancing and share part of these capital optimisation proceeds with unitholders
- Business model remains largely recession proof and inflation proof; credit metrics healthy
- Recent share price weakness overdone in our view; Maintain BUY with TP of S$0.57
9M23 highlights: Special distribution a positive surprise
KIT departed from recent tradition (semi-annual reporting and distributions) under new CEO Mr. Kevin Neo (replacing Mr. Jopy Chiang) and not only reported 3Q results and steady 3Q23 distributions (0.97Scts), but also took us by surprise by announcing a special dividend of 2.33Scts for the quarter to reward long time unitholders. Total 3Q23 DPU (ex-date: 9 Nov’23 and pay date: 20 Nov’23) would thus be around 3.30Scts (handy 7.5% yield for just one quarter) and 9M23 DPU will be around 5.23Scts, implying full year FY23 DPU of around 6.20Scts or 14% dividend yield at current prices. This compares to 3.82Scts DPU last year in FY22, which was slightly above the stable baseline DPU of 3.72Scts that KIT had paid out on legacy basis from FY15-20 – FY23 distributions will thus represent a blowout year for unitholders who have patiently stayed with KIT.
Thoughts and Outlook
Despite the presence of some one-offs in 3Q23 like refinancing fees, higher capex and taxes and a weaker AUD at Ixom and lower availability fees at Senoko wastewater plant, cash flow generation continued to be robust overall in 9M23, driven by the acquisitions completed in FY22, which was a very eventful year for KIT in terms of growing its portfolio. Under the new management team, we could be in for more excitement hereon, evidenced by moves to reward unitholders better on the basis of strength in underlying portfolio earnings and valuations. While this level of special distributions cannot be expected on a regular basis, management indicated that this is not a one-off and efforts will be made to share the proceeds of “capital optimisation” with unitholders from time to time. This means there could be upside to our base case distribution forecasts hereon. The Trust is currently trading at around 9% yield (ex-special distributions) with share price having retreated from S$0.52 to S$0.44 over the last 3-odd months, in line with interest rate hikes affecting market sentiment and closest comparable S-REIT sector declining as well. However, unlike many S-REITS, the Trust has limited exposure to economic cycles, counterparty issues, energy inflation or interest rate increases, so we believe share price has been over penalised and represents a great opportunity to accumulate, given a more dynamic management stance towards DPU growth. Maintain BUY with a DDM-based TP of S$0.57 (implied 7% target yield).
In terms of financials, KIT recorded S$266.1m in distributable income (DI) for 9M23, up 93% y-o-y, but this was made possible by addition of “capital optimisation” proceeds of S$131.2m to the DI for the 3rd quarter, which pays for the special dividend. Excluding these proceeds and corporate expenses, asset level cash flows were up 14.7% y-o-y in 9M23, driven by contribution from new acquisitions completed in FY22; EBITDA was up 28% y-o-y in 9M23. What is the “capital optimisation?” - essentially this is part crystallisation of the value created by KIT management from growing EBITDA at Ixom and CityGas, which has enabled the Trust to refinance borrowings with upsized credit facilities on the back of much stronger EBITDA levels. The capital optimisation concluded this year has yielded S$273m in funds for the Trust, part of which (S$142m) has been earlier used to pay down bridge loans taken to fund acquisitions completed in FY22, and the remaining S$131m is now being used to fund the special distribution for unitholders. We believe the timing of the special distribution ties in with the successful refinancing completed at Ixom level recently, where we have seen 52% growth in EBITDA from FY19-23 driven by organic and inorganic factors, which has allowed the Trust to optimise capital structure there and share some of the gains with unitholders.
Credit metrics remain healthy. At the end of 3Q23, net gearing (debt/ asset) stood at 36.8%, down from 38.5% as of end-1H23 and recent high level of 42.5% as of end-1Q23. KIT thus has around S$825m remaining debt headroom to 45% net gearing level, which is the S-REIT benchmark. Of course, business trusts have no regulatory gearing limit, and can lever up more if required. KIT’s weighted average interest rate fell by 10bps from 3.8% at end-1H23 to 3.7% at end-3Q23, despite the Ixom refinancing. According to management, around 79% of debt are fixed and hedged, and a 100 bps change in interest rate would have around 1.5% impact to distributable income. Given the inorganic growth in distributable income expected in FY23 well exceeds that, the impact of higher interest rates should not affect base DPU in FY23. Weighted average term to maturity of debt is around 3.4 years and no major refinancing is required in FY24/25.
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