Maintains strong deal flow, expands into Korea
- Continues acquisition spree, buying into leading integrated waste management platform in South Korea
- As an essential service provider with organic and inorganic growth potential, fits well into KIT’s portfolio and also supports ESG targets
- Acquisition will be accretive to distributable income once completed towards the end of 2022
- Delivery of cash flows from recently announced deals will be key to watch out for in 2H22; maintain BUY with TP of S$0.63
KIT announces proposed acquisition in environmental services space in Korea. KIT, together with co-investors Keppel Asia Infrastructure Fund (KAIF) and Keppel Infrastructure Holdings (KI), announced the acquisition of 100% stake in Eco Management Korea Holdings Co., Ltd. (EMK) for KRW626.1 billion (approximately S$666.1 million), through a SPV structure. KIT will hold 52%, KAIF 30% and KI 18% in this SPV. The deal is expected to be completed by the end of 3Q22, precedent on certain conditions. This deal had been reported to be in the working earlier, and resulted through negotiations with the seller through a competitive bid process. The seller is IMM Investment and Korea Development Bank Private Equity.
Who is EMK? EMK is a leading integrated waste management services player in South Korea, operating six waste-to-energy (WTE) plants and five sludge drying facilities, with an incineration capacity of 404 tonnes per day (third largest in South Korea) and waste oil refining capacity of 154 tonnes per day (largest in South Korea). It also manages and owns a landfill, which has the fourth largest capacity in the nation (1.5 million m3). Customers include municipals and blue chip names like LG, Samsung, Coupang et al and so far, there has been no counterparty issues.
How does it fit into KIT’s portfolio? 1) Waste management is an essential service and will continue to grow at a steady pace as cities expand, with minimal cyclical risk, 2) fits into the theme of circular economy and sustainable urbanisation, supporting KIT’s ESG targets 3) waste management market in Korea has high barriers to entry and supply-demand dynamics will be in favour of this business, aiding organic growth, according to management (EMK registered 25% EBITDA CAGR over FY19-21, aided by ASP growth and increase in volumes), 4) waste management market is highly fragmented in Korea, and there is potential for inorganic growth by consolidating smaller players in future.
What is the impact? Management has indicated that on a proforma basis, the acquisition would have boosted FY21 distributable income and DPUs by around 4%. However, in reality, the future accretion will likely be higher in actuality (in the range of 8-10%), as FY21 is not representative of normalised year, as some businesses are ramping up and the landfill only started operations in 2022. Still, given that average remaining life of the assets is likely less than 15 years on average (would need ongoing capex to extend that), the pricing looks to be on the higher side to us at first glance, and deal structuring, financing costs and future growth execution will need to be favourable to make the pricing dynamics work, in our opinion. If fully debt financed, gearing (net debt/ asset) will likely increase from current 0.31x to 0.40x and leave not much headroom to 0.45x benchmark. KIT will be taking a bridge loan to finance the equity portion of the deal for now, and will evaluate capital markets (including equity fund raising)/ borrowing options later to repay the bridge loan. Of course, if and when Ixom divestment is completed in 2023, sale proceeds could also be used to repay bridge loans used in financing prior acquisitions, so the risk of EFR is not high.
Maintain BUY, TP S$0.63.