Keppel Infrastructure Trust - Resilient assets support attractive yield

Summary

• Initiate coverage with BUY. We initiate coverage on Keppel Infrastructure Trust (KIT) with a BUY rating. KIT invests in infrastructure assets in developed markets that provide stable cash flows. About 65% of its revenue is linked to the CPI with cost pass-through. Assets under management reached approximately S$8.8 billion following the completion of acquisition of Ventura. 

• Distributions expected to grow. Excluding the one-off special dividend paid in FY23, we expect distribution per unit to rise in the next two years. Underpinning this will be: 1) a resumption of distribution from Keppel Merlimau Cogen Plant; 2) contributions from newly-acquired German solar plant; and 3) contributions from Ventura Bus operations in Victoria, Australia from 2H24.

• Optimise debt/equity mix to boost returns. As a business trust, KIT is not subject to the regulatory gearing cap. Total debt to total assets was 48.6% as at end-March 2024. This was well below bank covenants. The average cost of debt was 4.37% in 1Q24. It has room to issue up to 1,061 million new units to raise up to S$500 million, which have been approved by unitholders in May 2024. A capital raising via equity could lower distribution per unit.

• Attractive distribution yield of 8.5% for FY24E. We derived a target price of S$0.59 per unit based on the dividend discount model, on weighted average cost of capital of 9% and terminal growth rate of 2%. This assumes no new acquisitions and equity raising. KIT currently trades at distribution yield of 8.5% and 8.9% for FY24E and FY25E, respectively.

Initiate coverage with BUY

We initiate coverage on Keppel Infrastructure Trust (KIT) with a BUY rating. KIT invests in infrastructure assets in developed markets that provide stable cash flows. 

These assets offer essential services in energy transmission, environmental solutions, transport and infrastructure. 

About 65% of its revenue is linked to the CPI with cost pass-through. Assets under management reached S$8.7 bn as at end-March 2024.

Distributions expected to grow

Distribution per unit (DPU) grew at a CAGR of 18.5% over the last three years. Drivers were cash flows from newly-acquired assets and stronger earnings from existing assets. 

KIT’s City Energy and Ixom assets also returned S$131mn of cash to unitholders to optimize capital.  This was in the form of a special payout of 2.33 cents per unit in FY23. 

Excluding the one-off dividend, we expect DPU to rise in the next two years. Underpinning this will be: 1) a resumption of distribution from Keppel Merlimau Cogen Plant; 2) contributions from a newly-acquired German solar plant; and 3) contributions from Ventura Bus operations in Victoria, Australia from 2H24. 

Optimise debt/equity mix to boost returns

Net gearing was 41.1% as at 31 Mar 2024. As a business trust, KIT is not subject to the regulatory gearing cap. Internally, it keeps a gearing target of below 45%. 

Total debt to total assets was 48.6% as at end-March 2024. This was well below bank covenants. Average cost of debt, however, did edge up to 4.37% in 1Q24 (FY23: 4.25%). It may climb further as some lower-cost hedges roll off. 

KIT acquired 97.7% of Ventura Motors Pty Ltd in May 2024 for S$533mn. It financed the acquisition of the Australian bus company with a 15-month bridging loan. 

It has the option to fund this with new equity, since unitholders have given their approval for raising up to S$500mn through private placements and/or non-renounceable preferential offerings. 

But at the current share price, we estimate equity yields of 8.5% for FY24E, and 8.9% for FY25E. This makes equity fund raising less compelling than debt.

Attractive distribution yield of 8.5% for FY24E

We derived a target price of S$0.59 per unit based on the dividend discount model, on weighted average cost of capital of 9% and terminal growth rate of 2%. 

This assumes no new acquisition and equity raising. At this price, distribution yield would be 6.6% and 6.9% for FY24E and FY25E, respectively. KIT is trading at current distribution yield of 8.5% and 8.9% for FY24E and FY25E, respectively. 

Key risks are interest rates and a strong S$. If interest rates stay high, higher cost of debt could lower cash flows derived from the assets. Higher rates will also lift required returns from new investments. This limits the scope for new investments. A strong Singapore dollar versus the Australian dollar, euro and US$ would also lower cash flow received from overseas entities.

To read our analysis in more detail, download the full report here. 

Related links:

• Keppel Infrastructure Trust share price 

• Keppel Infrastructure Trust dividend history

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