Revising fee structures to incentivise growth, weighing attractive exit options at Ixom
- Proposes amendments to fee structure to better align Trustee-Manager’s interests with that of unitholders and support KIT’s growth plans
- Higher fees in future a trade off against the revitalised Trust’s push for inorganic growth and new focus areas apart from traditional assets
- Meanwhile, the Trust is also considering a possible divestment of Ixom, which could net it significant gains for further reinvestment
- Maintain BUY with S$0.60 TP
KIT has proposed amendments to its fee structure to bring it in line with current market practices. The Trustee-Manager of KIT has proposed changes to existing management fees and performance fee structures, with a view to peg these with distributable income and distribution growth in future, so as to better align Trustee-Manager’s interests with that of unitholders and support KIT’s growth plans. The proposal is to change the existing structure (S$2m fixed base fees + performance fees of 4.5% of Trust’s income, unchanged since 2010 when predecessor K-Green Trust had first listed) to: 1) Base Fee of 10% of KIT’s annual distributable income + 2) Performance Fee of 25% of any increase in distributions for the year compared to the previous year. This is in line with recent REIT listings – eg. ARA US Hospitality Trust, Daiwa House Logistics Trust, ECR, KORE, Prime US REIT, Sasseur and United Hampshire US REIT all have the same base fee and performance fee structure. The revision would bring total management fees for KIT To around 0.5% of AUM, which is at par with the average and median of these recently listed REITs. There is no change to acquisition or divestment fee structures.
Rationale of change in fee structure:
- Reflects the higher level of resources required to manage the current diverse portfolio of assets, which has grown over time, including recent acquisitions of Ixom, Philippine Coastal, and the Aramco gas pipeline stake, to an AUM of around S$4.6 comprising 9 assets across 5 countries. The Trustee-Manager’s staff strength has grown from 7 in 2010 to 21 currently, and there are plans to establish more representative offices in different geographies like Australia, Europe and the Middle East to better scout for deals and manage assets on the ground, and hence, staff strength will grow further over the next 5-10 years.
- The proposed fee structure will thus enable the Trust to execute on its inorganic growth strategy, as highlighted in the recent strategic review, where the Trustee-Manager has identified new asset classes including those supporting the decarbonisation economy, low carbon assets, digital assets etc as new focus sectors apart from traditional utility assets. The Trustee-Manager will thus need to invest in global reach and talent pool to identify suitable opportunities.
- Proposed fee structure better aligned to unitholder’s interests – pegged to cash generated by KIT and pegged to DPU growth
What next? What are the financial implications? The revised fee structure will be up for voting at an Emergency General Meeting (EGM) to be held on 19 April 2022. The Independent Financial Adviser (IFA) has deemed that the revision in fee structure is on normal commercial terms and not prejudicial to the interests of KIT and minority unitholders of the Trust. In accordance with this opinion, KIT’s Audit Committee and Independent Directors have recommended that unitholders vote in favour of the fee structure revision at the EGM. If approved, it will be implemented progressively over FY22 – only comes into effect from 2H2022 with new: existing fee structure in 33:67 ratio in 3Q22, 67:33 ratio in 4Q22 and new fee structure comes in completely from start of FY23. Thus, total management fees in FY22 would not be markedly different from levels in FY20/21 (around S$11.7-11.8m), but come FY23, total management fees would jump materially to around S$21m. This would have an impact of lowering distributable cash flows to unitholders by around S$10m or so (or around 5% of existing annual distributable income of roughly S$200m), and this would have to be offset by cash flow from new acquisitions during the timeline for future DPUs to stay consistent or increase.
Seems a reasonably fair trade off for growth. The fee structure revision seems to be in line with management’s ambitious vision to grow the business through acquisition of core and core plus assets in developed economies and transform the business to become a infrastructure player with serious global reach and much bigger AUM in the years to come, competing on a level playing field with other global infrastructure asset managers. Given its own ambitions to scale up, as well as parent Keppel Capital’s vision to scale to a S$100bn AUM size over the next decade, KIT would need resources to source and increase deal flow to execute on these plans faster. The management fees had stayed stagnant when the Trust’s DPUs had stayed stationary for the last many years, but now that KIT management wants to actively grow the portfolio and grow DPUs, probably change is warranted to incentivise this growth. Moreover, these fees are well benchmarked to recent market practices and are not out of line with other similar Trusts and REITs in the Singapore market, and hence is not a cause for concern on the governance front.
Meanwhile, capital recycling through potential divestment of Ixom could be a catalyst in near to medium term. KIT management had recently announced that the Trust is currently undertaking a strategic review of its 100% stake in Ixom Holdings, with a view to potentially unlocking value from the business. Ixom – a leading chemical manufacturing and distribution business in Australia and New Zealand – had been acquired by KIT back in 2019 at an equity value of around A$1.1bn, and has since performed admirably in delivering better than expected cash flows to unitholders, even through the pandemic and related supply chain disruptions. It is likely that Ixom has received some unsolicited bids already and the Trustee-Manager would be appointing a financial adviser and evaluate the options on the table. Given the robust performance of Ixom and comparable valuation benchmarks of 14-15x EV/EBITDA, Ixom could be valued at close to A$2.2bn enterprise value and A$1.6bn equity valuation, by our estimates. This would reflect massive capital gains for the Trust if the disposal goes through. KIT could use the disposal proceeds to acquire other businesses in the deal pipeline as and when bids are successful and meanwhile, top off the loss in distributable cash flows to unitholders, until new assets are added on. With the higher capital base at its disposal, KIT should ideally be able to acquire assets providing higher cash flow quantum, using the divestment proceeds, thus helping to grow DPUs. We are currently not factoring this in our forecasts, but leave it as an upside.
Maintain BUY with unchanged TP of S$0.60.