Keppel Infrastructure Trust has raised its DPU for the first time in five years, following the strength and resiliency shown by its portfolio despite the pandemic. In this article, we share what is in store for this high dividend-paying stock moving forward.
- Keppel Infrastructure Trust (KIT) (SGX:A7RU) is known for its stable distribution, anchored by long-term cash flows from various essential businesses.
- In FY2021, with the strength and resiliency of its portfolio, KIT increased its DPU to SGD 3.78 cents. This is the first time DPU has grown from the stable SGD 3.72 cents since FY2016.
- Looking ahead, assets and businesses such as City Energy Go and Aramco Gas Pipelines Company are poised to benefit from secular growth trends, while a healthy balance sheet leaves a comfortable debt headroom for KIT to pursue inorganic growth opportunities.
- KIT has announced a proposal to amend its existing management fee and performance fee structures, which puts it in line with newly listed S-REITs and selected business trusts, and is a move that will incentivise DPU growth.
- We upgrade our target price to SGD 0.62, which translates to an upside potential of approximately 9% based on the closing price of SGD 0.57 on 13 April 2022. In addition, investors could expect an attractive yield of approximately 7% in FY2022.
From a small business trust then known as K-Green Trust in 2010, Keppel Infrastructure Trust (KIT) (SGX:A7RU) has grown into a large and well-diversified trust with approximately SGD 4.6 billion assets under management as at February 2022. KIT is also known for its stable distributions, anchored by long-term cash flows from various essential businesses across the segments of Distribution & Network, Energy, and Waste & Water.
In this article, we share an overview of the trust’s FY2021 results and the exciting developments ahead that investors can look forward to.
DPU increased for the first time since FY2016
In FY2021, KIT recorded a free cash flow to equity (FCFE) of SGD 192.2 million, 14.8% lower as compared to the previous year mainly due to timing differences inherent in the fuel price pass-through gas tariff mechanism at City Energy (previously known as City Gas). Nonetheless, we bear in mind that City Energy has no exposure to fuel price risk over time.
Investors may also wish to note that FCFE is equivalent to the distributable cash flows commonly used by REITs. This metric is essentially the amount of cash that can be distributed to shareholders (net of trust expenses, distribution paid/payable to perpetual securities holders, management fees and financing costs), and hence is an appropriate measure for the performance of dividend-paying KIT.
Overall, KIT’s FCFE in FY2021 remains high relative to historical levels, largely due to a stable performance at Ixom since its acquisition in 2019. Coupled with the resiliency shown by KIT’s portfolio despite the pandemic in the last two years, the management led by new CEO Jopy Chiang made the decision to raise DPU to SGD 3.78 cents, at a payout ratio of 98% (Figure 1). This represents a growth of 1.6% year-on-year, and is a breakaway from the stable SGD 3.72 cents since FY2016.
Figure 1: DPU increased for the first time after five years of stable distributions
We have also summarised the key project highlights for KIT in FY2021:
- Completed the acquisition of Philippine Coastal Storage & Pipeline: Philippine Coastal is the largest petroleum products (e.g. diesel, gasoline, jet fuel etc.) storage facility in the Philippines, with a capacity of 6 million barrels. A large majority of its customer base are industrial customers or government agencies with USD-denominated “take-or-pay” contracts. This mitigates Philippine Coastal’s exposure to petroleum price as well as volume risk, as a minimum payment will be guaranteed if the customer does not follow through with buying the full agreed amount of products.
- The rebranding of City Gas to City Energy: After 160 years of service as Singapore’s sole piped town gas provider, the rebranding of City Gas marks its transformation journey as a provider of innovative green energy solutions. The rebranded City Energy rides on opportunities in the low-carbon economy, with new business lines including an electric vehicle (EV) charging service called Go.
- Long-running troubles at Basslink get some closure: In view of ongoing disputes since 2015 with its customer Hydro Tasmania and an unsuccessful sale process with Australian energy infrastructure business APA, Basslink has entered into voluntary administration – a process involving the appointment of an external administrator to help determine the best course of option for the future of the business. Regardless, Basslink’s loans are non-recourse to KIT and ring-fenced at the asset level. Basslink also does not contribute to KIT’s FCFE, and hence is not expected to have any impact on DPU.
Aiming towards a sustainable DPU growth
Looking ahead, we believe that KIT has strong growth visibility, which spells a sustainable growth in DPU.
On the organic growth front, City Energy Go will be among the EV charging services in Singapore (including SP Group, Shell Recharge etc.) that can capitalise on the government’s ambition to phase out internal combustion engine (ICE) cars by 2040. According to Fitch, EV sales in Singapore are expected to grow at an incredible compound annual growth rate (CAGR) of 40% from 2022 to 2030.
Meanwhile, KIT also aims to drive its business through inorganic growth. Earlier this year, KIT was part of a global consortium (led by BlackRock and Hassana Investment Company) which completed the acquisition of a 49% stake in Aramco Gas Pipelines Company. Aramco Gas Pipelines Company holds a 20-year lease-and-lease back agreement over the usage rights of Saudi Arabian public oil and gas company Aramco’s gas pipelines network. In return, it will receive a quarterly tariff for the gas products that will flow through the network, backed by a minimum volume commitment.
Natural gas is expected to play a key role in Saudi Arabia’s aim to achieve net-zero emissions by 2060. Aramco estimates that its gas production could potentially increase by more than 50% by 2030, representing a CAGR of approximately 4%. This in turn, could translate into higher revenue for Aramco Gas Pipelines Company.
KIT is not resting on its laurels after the purchase of Aramco Gas Pipelines Company. Pending lenders’ and regulatory approvals, an acquisition of the remaining 30% stake in SingSpring Desalination Plant is expected to be completed in the first half of this year.
Despite the new acquisitions, KIT’s gearing ratio fell to 38.4% (as of 31 December 2021) thanks to the de-recognition of Basslink following its voluntary administration. Bear in mind that KIT, a business trust, is not subjected to the REITs’ gearing limit of 50%. If cash holdings were taken into account, KIT’s net gearing comes down even further to 20.3%.
In any case, we believe it is clear that KIT has a comfortable debt headroom to pursue more inorganic growth opportunities, which should translate to sustainable DPU growth going forward.
Figure 2: A healthier balance sheet
Proposed fee amendments to incentivise growth
On 28 March 2022, the Trustee-Manager of KIT – Keppel Infrastructure Fund Management (KIFM) – announced its proposed amendments of the Trust’s existing management fee and performance fee structures. The new base fee and performance fee structures, which would take effect from 3Q22, will be pegged to 10% of annual distributable income and 25% per annum of DPU growth respectively. It has been observed that this is in line with S-REITs listed in the last five years and selected business trusts.
The proposed fee structure aims to align the interest of KIFM with that of KIT unitholders. It also better reflects the required level of resources to effectively manage and operate KIT’s diverse portfolio. In 2010, KIFM had seven employees managing three local assets valued at SGD 760 million. Now, there are 22 employees managing nine assets across five countries tagged at a value of approximately SGD 4.6 billion.
Furthermore, KFIM is looking to establish offices in key overseas markets to create new synergies and increase deal flow. The proposed fee structure is likely to facilitate the acceleration of KIT’s inorganic growth plans. We understand from the management that KIT aims to reduce its reliance on concession-based assets.
To that end, it will rejuvenate and diversify its portfolio into evergreen, yield accretive assets and businesses benefitting from secular growth trends (Table 1). Geographically, the Trust is focused on tier 1 and 2 markets in APAC and EMEA. Some of these markets which KIT has yet to enter include Japan, South Korea, the UK, and Europe.
Table 1: Renewed focus towards growth
| Key Asset Classes | Examples |
| Traditional asset classes with long-term utility-like contracted cash flows | Utilities, Transmission and Distribution |
| Assets classes that benefit from the low-carbon economy | Energy Transition, Environmental, Renewables |
| Asset classes that support the digital economy | Digital and Communications |
| Socio-economic infrastructure that furthers economic growth and enhances social well-being | Transportation, Social |
| Source: Keppel Infrastructure Trust |
In terms of the financial implications of the proposed fee structure, total fees are estimated to remain comparable in FY2022 and increase substantially in FY2023. Nonetheless, we believe that the increase in expenses are likely to be offset by cash flows from new acquisitions. Hence, unitholders are unlikely to be short-changed, given that KFIM would be incentivised to grow KIT’s portfolio as well as DPU. We would expect to see a reasonable growth in DPU over the next few years even under the proposed fee amendments.
Figure 3: Illustrative financial impact
Key investment risks
Contract renewal risk: Most of KIT’s assets obtain their revenue from long-term contracts. There is no guarantee that contracts will be renewed once they expire, and non-renewals would affect distributable cash flows. The earliest expiring contracts are the Senoko WTE Plant concession in 2024 and the SingSpring Desalination Plant concession in 2025. Nonetheless, given the proactive growth initiatives, even if these contracts were to expire, KIT likely still has enough cash flows to cover for its distributions.
Performance risk: Concession-based assets (e.g. Senoko WTE Plant, Singspring Desalination Plant) have contractual obligations to make available a certain capacity. Otherwise, payments will not be received in full. If KIT’s concession-assets are unable to meet their service obligations, distributable cash flows are likely to be affected.
Attractive dividend yield of 7%
We use a dividend discount model (DDM) to value KIT, as it has been paying out regular distributions. We revise our DPU estimates to factor in the new acquisitions, while assuming an average payout ratio of 90% and a terminal growth rate of 1%. Our target price for KIT has been upgraded to SGD 0.62, which translates to an upside potential of approximately 9% based on the closing price of SGD 0.57 on 13 April 2022.
In addition, we believe that a key selling point of KIT is none other than its sustainable DPU derived from resilient distributable cash flows. We estimate that investors could receive a yield of approximately 7% in FY2022.
Overall, Keppel Infrastructure Trust (SGX:A7RU) is able to deliver value through a combination of organic as well as inorganic growth, anchored by essential assets and businesses riding on secular growth trends and a healthy balance sheet. Besides, the latest growth in DPU after years of stability and the proposed revised fee structure will likely pave the way for more DPU hikes. We believe that KIT has welcomed winds of change, and investors seeking sustainable income should not miss out on this stock.
Table 2: DPU growth
| 2021 | 2022E | 2023E | 2024E | |
| DPU (SGD cents) | 3.78 | 3.81 | 3.84 | 3.86 |
| DPU Growth (%) | 1.6 | 0.8 | 0.8 | 0.5 |
| Yield (%) | 6.9 | 6.7 | 6.7 | 6.8 |
| Source: iFAST EstimatesData as of 13 April 2022 |