Keppel Infrastructure Trust (KIT) Preferential Offering - What should unitholders do?

What happened? 

For investors in Singapore looking to earn some dividend income, Keppel Infrastructure Trust (KIT) has been one of the business trusts offering a consistent dividend payout. 

It is no wonder that its recently announced preferential offering attracted the interest of many investors. 

As part of Keppel Infrastructure Trust’s preferential offering, it is offering shareholders the rights to buy 5 new units for every 100 old units, at S$0.467 each. 

The proceeds from the preferential offering will be used to finance various acquisitions Keppel Infrastructure Trust has made recently.

If you are a Keppel Infrastructure Trust shareholder wondering what you should do about the preferential offering, read on to find out!

What you need to know about the Keppel Infrastructure Trust (KIT) preferential offering

• KIT is offering shareholders the rights to buy 5 new units for every 100 old units, at S$0.467 each. 
• It will also pay a distribution of S$0.0124/unit (stub distribution), expected to be paid on 11 May 2023.
• All who bought KIT on or before 24 April 2023 are eligible to subscribe to the preferential offering and to the stub distribution.
• Subscription to the preferential offering and payment will open on 2 May and close on 10 May 2023.
• The new preferential offering units are expected to be allotted and traded from 18 May 2023.
• Proceeds will be used to partially repay a bridge loan that was drawn down to acquire an integrated waste management company in South Korea, a German offshore wind farm, and subscription to Wind Fund which holds European onshore wind farms.

#1 The theoretical price after the placement, preferential offering and stub distribution is S$0.503

KIT recently completed a placement of 383.6m new units at S$0.477 per unit, to raise S$183m. 

These new units will be traded from 27 April 2023, and are not entitled to subscribe to the preferential offer.

It will pay the distribution accrued to unit holders from beginning of 2023 to the placement date. 

Investors who bought KIT on or before 24 April 2023 will be entitled to this distribution (known as stub distribution) of S$0.0124/unit, and to subscribe to the preferential offering.

Based on Keppel Infrastructure Trust's last cum price of S$0.52 on 24 April 2023, the theoretical price after the placement, preferential offering exercise and the stub distribution is S$0.503 per unit.

#2 The preferential offering will be fully subscribed

The preferential offering is fully underwritten by the joint lead managers, bookrunners and underwriters which are Citigroup, DBS, HSBC, OCBC and UOB.

#3 The preferential offering proceeds will be used to pare down bridge loans

Proceeds from the preferential offering will be used to partially repay a bridge loan which was used to fund the three acquisitions. The outstanding bridge loan is about S$438m.

Together with the placement proceeds, we estimate net gearing could be lowered from 42.5% as at 31 March 2023 to about 36.5%. 

This does not take into account outstanding perpetual securities of S$600m which are classified as equity.

What are the reasons to be positive on Keppel Infrastructure Trust?

#1 - Acquisitions completed in 2022 contributed S$36.4m to distributable income in 1Q23

In 2022, KIT acquired stakes in Aramco Gas Pipelines Company, European Onshore Wind Platform, an offshore wind farm in Germany and a waste management services provider in South Korea for S$1.09bn. 

These assets contributed S$36.4m to distributable income in 1Q23, close to 50% of Keppel Infrastructure Trust’s total distributable income during this period

#2 - More than 90% of its portfolio is protected from inflation

About 65% of portfolio has built-in costs pass through mechanisms or with revenue indexed to the CPI. 

About 30% of the portfolio are leaders in their fields and enjoy stronger pricing power.

What are the risks for Keppel Infrastructure Trust? 

#1 - High debt levels could lead to higher interest expense 

Keppel Infrastructure Trust’s total debt has risen to S$2.9 billion as at 31 March 2023 after the acquisitions. This would represent a net gearing of 42.5%. 

The share placement and preferential offering will raise S$300m and partly bring down debt levels. 

However, with a weighted average cost of borrowings is 3.7%, interest expenses could go up with rising interest rates.

#2 - Debt repayments could lower distributable income

Keppel Infrastructure Trust has significant debt that are due for repayment in 2023 and 2024, and its distributable income could be impacted if they are not able to refinance the debt.

For example, the S$700m sustainability-linked loan at Keppel Merlimau Cogen plant (KMC) is due for scheduled amortized repayment from June 2023. 

The repayment will amount to S$44m a year, close to KMC’s distributable income of S$43 million in FY22. 

It is no wonder that Keppel Infrastructure Trust expects distributable income for KMC to be “significantly negated” by the mandatory debt repayments in June 2023. 

Ixom’s S$105m revolving credit facility due in Feb 2024 needs to be refinanced in 2023. A further S$483m is also due in 2024

If Ixom and KMC seek refinancing options for their loans, the average cost of borrowings could rise further. 

What would Beansprout do?

The share price of Keppel Infrastructure Trust has fallen from a 52-week high of S$0.60 to below S$0.50 as of 26 April 2023. 

This reflects investor concerns about its high debt levels and significant debt repayments in the next 1-2 years, which could lower its distributable income. 

The preferential offering will help to bring down its gearing level from 42.5% to about 36.5%. 

The good news is that the acquisitions made have contributed positively to its distributable income, and now make up about 50% of its distributable income in the first quarter of 2023. 

They also help to accelerate Keppel Infrastructure Trust’s green transition, increasing its exposure to renewable energy to 10% of assets under management. 

With the rights price of S$0.467 at a discount to the theoretical ex-price of S$0.503 after the placement, preferential offering and stub distribution, it might be worthwhile to consider subscribing for the preferential offering.  

If you are looking for other Singapore dividend ideas to grow your passive income, check out our guide to selecting the best REIT for your portfolio. 

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