• Keppel Infrastructure Trust's 2Q19 DPU of 0.93Scts as expected.
• Acquisition of Australian chemical distributor Ixom completed in 1Q19, contributes to cash flows.
• Successful equity fund raising exercise followed by perps issue demonstrates healthy investor demand.
• Maintain BUY with Target Price of S$0.58.

Fund Raising Successful; Maintain BUY

• KEPPEL INFRASTRUCTURE TRUST (SGX:A7RU) maintained its record of steady DPU of 0.93 Scts in 2Q19, as expected, on the back of healthy distributable cash flows for the quarter.
• Keppel Infrastructure Trust has recently completed the acquisition of Australian chemical distributor Ixom, and subsequent rounds of equity fund raising (EFR) exercise of around S$500m and perpetual securities issue worth S$300m to fund the acquisition has been well accepted by investors. This is significant in securing long term visibility of distributions for Keppel Infrastructure Trust.
• To recap, many of Keppel Infrastructure Trust’s assets derive revenue from availability-based payments, independent of actual offtake. Hence, cash flows are predictable and not significantly exposed to economic cycles.

Where We Differ

• We believe the Trust is sufficiently protected from troubles at Basslink, which is in the midst of arbitration proceedings against its counterparties related to a 6-month outage in 2016. We expect that even in the worst case scenario, Keppel Infrastructure Trust should not be liable to pay any damages as any claims against Basslink are ring-fenced at the Basslink level.
• In any case, Keppel Infrastructure Trust does not depend on cash flows from Basslink for current distributions, and project loans are also non-recourse to Keppel Infrastructure Trust.
• We ascribe zero value to Basslink in our valuations for Keppel Infrastructure Trust, hence the negative newsflow from Basslink is an irritant at best and does not affect Keppel Infrastructure Trust’s fundamentals.

Potential Catalyst

• The fund raising exercises have strengthened Keppel Infrastructure Trust’s balance sheet and broadened investor base, and a successful integration of Ixom should lead to better investor perception and future yield compression for the stock.

What's New - 2Q19: Another Steady Quarter

2Q19 distribution in line.

• Keppel Infrastructure Trust declared DPU of 0.93Scts for 2Q19, in line with previous quarters. Group revenue was not comparable as the Ixom acquisition was completed on 19 February 2019, and this was the first full quarter contribution from Ixom, which accounted for S$249m revenues out of Group revenues of S$418m for the quarter (up 193% y-o-y and 31% q-o-q due to the acquisition).

Distributable Cash Flows for 2Q19 Slightly Lower Than Expected at S$45.8m

• Excluding Ixom, distributable cash flows would have been S$35.6m, in line with usual run rate and at par q-o-q. City Gas contributions normalised after a strong 1Q19. City Gas earnings tend to lag the movements in underlying fuel prices but the effect will smoothen out over time though.
• Cash flows from other key assets including KMC power plant and the water and waste treatment assets remained stable.
• Ixom generated around S$10.2m of distributable cash flows, which was slightly lower than our expectation of around S$13m for the quarter, likely due to timing issues. For the approximate 1-month 10-day period under Keppel Infrastructure Trust in 1Q19, Ixom had generated distributable cash flows of S$5.9m. Earnings and cash flows for Ixom are expected to improve in subsequent quarters as they are seasonally stronger in second half of the year. This will form a strong support for Keppel Infrastructure Trust’s overall distributions.

Successful perpetual securities issue follows recent equity fund raising (EFR) exercise.

• To recap, Keppel Infrastructure Trust recently completed an EFR exercise – to partially finance the acquisition of Ixom – by raising approximately S$500.8m via Placement as well as a Preferential Offering. As part of continuing prudent capital management efforts, Keppel Infrastructure Trust further established a S$1 billion multicurrency debt issuance programme on 23 May 2019 to diversify the Trust’s funding sources.
• In June 2019, Keppel Infrastructure Trust successfully raised a total of S$300m 4.75% perpetual securities (callable in 2029) in two tranches. The first tranche of S$200m was well-received by investors, and enquiries for additional demand led management to issue a second tranche of S$100m.

Trust on a firm footing for the future.

• We believe this demonstrates investors’ confidence towards Keppel Infrastructure Trust’s credit profile and long-term cash flow sustainability. With the issue of the perpetual securities, the remaining bridge loan taken to finance the acquisition of Ixom has now been fully repaid, and a portion of Keppel Infrastructure Trust’s Trust level borrowings have also been repaid. This improves the Trust’s gearing profile as well.

Basslink arbitration continues, timeline still uncertain.

• Basslink continues to maintain its position that the Basslink Interconnector failure, which led to a six-month outage in 2016, was a Force Majeure Event under the Basslink Operations Agreement and Basslink Service Agreement and strongly denies all allegations made by the State of Tasmania and Hydro Tasmania, who are its counterparties.
• Basslink is vigorously defending itself in the arbitration, through which it hopes to recover the withheld amounts from Hydro Tasmania. While management believes that proceedings could be completed by end-2019, we believe this could drag on for longer.

We believe KIT is sufficiently ring-fenced from troubles at Basslink.

• We believe the Trust is sufficiently protected from ongoing issues at Basslink. Basslink has around A$694m outstanding borrowings, which mature in November 2019. Basslink is currently negotiating a Long Term Financing Plan with its banking syndicate, but there is no agreement yet. There is no contractual recourse though to Keppel Infrastructure Trust under the project financing arrangements. As far as arbitration proceedings go, even in the worst case scenario, Keppel Infrastructure Trust should not be liable to pay any damages as any claims against Basslink are ring-fenced at the Basslink level.
• In any case, Keppel Infrastructure Trust does not depend on cash flows from Basslink for current distributions, and project loans are also non-recourse to Keppel Infrastructure Trust. We ascribe zero value to Basslink in our valuations for Keppel Infrastructure Trust, hence any negative newsflow from Basslink is an irritant at best and does not affect Keppel Infrastructure Trust’s fundamentals.

Maintain BUY With Unchanged Target Price of S$0.58

• We believe the Ixom acquisition is a step in the right direction by Keppel Infrastructure Trust’s management as it diversifies the asset base, stabilises NAV decline, lengthens the effective life of the Trust, and creates organic growth potential which was largely missing till now.
• With an enhanced asset base and stronger balance sheet, we look forward to further acquisition trajectory.
• Dividend yield has compressed to around 7.4% currently, but we believe there is room for further yield compression, especially amid dovish interest rate scenario currently. See Keppel Infrastructure Trust's dividend history.

Source: DBS Research - 16 Jul 2019