KIT announces investment in Aramco Gas Pipelines Company
- KIT to invest US$250m as minority partner in acquisition of stake in gas pipelines business of Saudi Aramco, led by BlackRock
- 20 year lease-and-leaseback agreement over the usage rights of Saudi Aramco’s gas pipelines network provides visibility of cash flows
- If fully debt-funded, will raise leverage from 20.3% to 27.7%, still leaves enough headroom for further M&A
- Deal is likely at least 5% accretive to DPUs, maintain BUY with TP of S$0.60
KIT announced the proposed investment of US$250m (~S$337.5m) in the gas pipelines business of Saudi Aramco, the national oil company of Saudi Arabia. It will invest as part of a bigger consortium led by BlackRock and Saudi-based Hassana Investment Company. The consortium will be purchasing a 49% stake in Aramco Gas Pipelines Company, a subsidiary of Saudi Aramco, for US$15.5bn. Aramco will continue to hold the majority 51% stake. KIT will thus hold a minority and non-controlling interest in the business, which should be equity accounted in future.
Long term revenue model. Aramco Gas Pipelines Company holds a 20-year lease-and-leaseback agreement over the usage rights of Saudi Aramco’s gas pipelines network. Aramco Gas Pipelines Company will receive quarterly tariff payments backed by a minimum volume commitment from Aramco, which will retain full ownership and operational control of the Gas Pipelines Network. Post completion of the deal, the structure will look like this:
Source: Company
Rationale of the acquisition:
- Assets fit well within KIT’s portfolio of long-term predictable cash flows, given the 20-year lease and leaseback arrangement and minimum volume commitments
- Counterparty risk is low as Aramco is one of the largest listed companies globally (market cap of US$2trn) and is a government backed entity with strong credit ratings of A1 and A rating by Moody’s and Fitch, respectively
- Prospects of low single digit growth in cash flows from growth in gas volumes transiting through the pipeline – gas demand in Saudi Arabia is expected to grow at around 3.7% CAGR till 2030, as the country transitions to a more sustainable economy by transitioning away from oil to gas use in certain sectors
- Operational risks are low as Aramco will continue to manage the assets with high operating standards and the asset is of strategic importance to Aramco
The acquisition will likely be fully debt-funded. KIT intends to fund the purchase with internal sources of funds and existing debt facilities, including a two-year bridge facility taken up at KIT holdco level. This bridge facility will be repaid over time using a combination of equity and debt issuances, as convenient. KIT’s gearing level (debt/ assets), which had fallen to 20.3% after the deconsolidation of Basslink, will rise to an estimated 27.7% if the acquisition is fully debt funded, which is well within benchmark levels, and hence, we do not think equity fund raise is likely for this deal.
Dividend accretion likely in FY22/23. While management has not disclosed the likely level of free cash flows or distributable cash flows that would be generated from this investment, an analysis of estimated cash flow accruals minus interest costs leads us to expect at least around S$10m of incremental cash flows annually, which would be around 5% accretion to DPUs. Pending further clarity on actual cash flow levels, we are not changing our numbers for now. While KIT has seen some recent weakness in share price, likely owing to market expectations of interest rate hikes, potential DPU hikes in future could offset the yield spread concerns. Maintain BUY with TP of S$0.60.