• Keppel Infrastructure Trust's 3Q19 DPU of S$0.93 in line.
• Newly acquired Ixom delivers seasonally strong quarter, drives distributable cash flows up 22% q-o-q.
• Divestment of DC One strengthens coffers for future M&A ambitions.
• Maintain BUY with Target Price of S$0.58; stock still offers around 15% total return including 7% yield.

What’s New

Keppel Infrastructure Trust's 3Q19 distribution in line.

• KEPPEL INFRASTRUCTURE TRUST (SGX:A7RU) declared a DPU of 0.93Scts for 3Q19, in line with previous quarters. See Keppel Infrastructure Trust's dividend history.
• Group revenue was down 3% q-o-q to S$407.5m, as a result of a revenue shortfall at Basslink, which was affected by an overground cable failure from 24 August 2019 to 29 September 2019.
• Note that Basslink does not contribute to distributable cash flows. All other assets largely performed to expectations.

Distributable cash flows for 3Q19 exceeds expectations.

• The key metric – distributable cash flows – was up 22% q-o-q to S$55.7m, leaving a significant buffer over and above the quarterly distribution payout of S$46.4m. This was due to a strong performance from recently acquired Australian chemical distributor Ixom, which benefited from seasonal high demand factors in the second half of the year.
• City Gas contributions were also higher than the previous quarter, as tariff changes lagged lower fuel prices, though the effect smoothens out over time.
• Cash flows from other key assets including KMC power plant and the water and waste treatment assets remained stable. The loss of contributions from DataCentre One (DC One), which contributed around S$1.3m of distributable cash flows in the last few quarters, after the proposed sale of the asset will not affect future distributions, as there is enough buffer, as evidenced above. Thus, visibility for Keppel Infrastructure Trust’s overall distribution trend remains strong.

DC One divestment strengthens balance sheet.

• On 16 September 2019, Keppel Infrastructure Trust had announced the proposed divestment of Keppel Infrastructure Trust’s 51% stake in associate DC One to Keppel DC REIT (SGX:AJBU) for a consideration of S$102.9m. The estimated net proceeds to be received by Keppel Infrastructure Trust is around S$51m (after repayment of DC One’s loans) and expected to be redeployed into future acquisitions. See Keppel Infrastructure Trust's announcements. We do not expect any lumpsum distributions accruing from the sale proceeds.
• After the equity fund raising (EFR) exercise and the perpetual securities issuance earlier this year, the acquisition of Ixom has been fully financed, and a portion of Keppel Infrastructure Trust’s borrowings have also been repaid. The sale of DC One will improve the Trust’s gearing position further, and puts it on a firm footing for the future.

Basslink arbitration continues, expected to conclude in 2020.

• 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.
• Management has currently indicated that arbitration proceedings will conclude in 2020, but we believe this could drag on for longer.
• Meanwhile, the Basslink project loan worth around A$692m is due in November 2019, and discussions have been ongoing for a year with banking syndicate regarding the refinancing of the loan facility. Negotiations regarding refinancing and extension of the facility are in the final stages now, but there is no visibility yet on revised terms and conditions, if any, including revisions to the rate of interest.

We believe Keppel Infrastructure Trust is sufficiently ring-fenced from troubles at Basslink.

• We believe Keppel Infrastructure Trust is sufficiently protected from ongoing issues at Basslink. While there is no agreement yet on the loan refinancing, there is no contractual recourse 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 for 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 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 has been 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 acquisitions ahead.
• Dividend yield has compressed to around 7.0% currently after sustained share price uptrend since August 2019, which demonstrates investors’ confidence towards Keppel Infrastructure Trust’s credit profile and long-term cash flow sustainability, but we believe there is room for further yield compression, especially amid ongoing macro uncertainties, which is creating a flight to safety and preference for yield instruments. See Keppel Infrastructure Trust's share price; Keppel Infrastructure Trust's dividend history.

Source: DBS Research - 15 Oct 2019