Another landmark acquisition in Australia?
- KIT acquires Melbourne’s largest bus service operator, Ventura, for an enterprise value of A$600m
- Justifiable as a critical infrastructure asset as >80% of revenue backed by long-term inflation-protected government contracts
- Likely to be funded by another equity fund raising exercise in due course; but still accretive to DPUs after factoring this in
- Maintain BUY with S$0.57 TP; expect M&A momentum to continue in 2024
Big acquisition to start off the year. KIT announced that it would be acquiring an approximately 98.6% stake in Ventura Motors, the largest bus service business in the state of Victoria, Australia for an enterprise value of A$600m (~S$540m). Ventura was a family-owned business and had been put on the block last year, securing interest from multiple infrastructure funds and bus operators, and KIT emerged as the successful bidder at the end. Mr. Andrew Cornwall, Managing Director of Ventura will remain on as Chief Executive Officer and retain a minority stake in the business, ensuring continuity. The purchase consideration is around A$328m (equity value) or S$295m, which will be initially funded by bridge financing. Total acquisition cost will amount to around S$570m on completion, which includes existing loans at Ventura Group and acquisition related costs. KIT is proposing to undertake an equity fund raising exercise comprising of placement and preferential offering similar to the EFR exercise conducted in 2023 to fund this acquisition cost. The transaction implies an EV/EBITDA of around 7.9x on historical numbers, which is roughly in line with precedent transactions. Overall, we think the price paid by KIT seems reasonably fair if cash flows remain stable and predictable.
Can this be another Ixom? KIT’s acquisition of Ixom had also raised concerns on whether this fits in the infrastructure asset category but has since proved to be a solid value creating acquisition. The reason this asset also fits the bill of a critical utility asset is that 80% of the revenues are derived from long-term government route services under an 8+2 year contract that expires in 2028, which means revenues are mostly availability-based (cost + margin) and does not depend on passenger volume or fares. It is also inflation-protected through regular indexation adjustments. Capex for fleet upgrades and depot upgrades are reimbursable, which is crucial given the move towards electrification of the fleet over time. We do believe this looks a riskier asset than most others in KIT’s portfolio, given the risk of contract extensions, short life of bus assets and risk of obsolescence of assets as EV buses gain momentum, requiring continuous upfront capex even if reimbursable over time. But there is potential of organic growth from private bus charters, expansion of network, bolt on acquisitions and potential of utilising Keppel Group’s knowhow in setting up EV charging infrastructure. While this represents a significant acquisition in terms of accretion to cash flows (around S$26m funds from operations, which is 10% of KIT’s 2023 total), accretion to DPU is expected to be lower at around 3.4% as estimated by management, owing to assumed dilution from EFR exercise. Once initial acquisition costs and EFR related costs are done with, contribution in following years should be higher in our opinion. Given the uncertainty around timing of deal completion and timing and terms of EFR exercise, we are not changing our numbers for now. Maintain BUY with unchanged TP of S$0.57. More M&A excitement looks set to follow in 2024.