• Keppel Infrastructure Trust's 2H20 distribution maintained at S$0.0186/unit, brings FY20 full year distribution to S$0.0372/unit, implying yield of ~6.8%.
• Keppel Infrastructure Trust's FY20 distributable cash flows up 20% y-o-y to S$225m as Ixom outperforms.
• The proposed acquisition of Philippines petroleum tank storage asset enhances visibility of distributions.

Maintains Stable DPUs Even as Distributable Cash Flows Shine

• Keppel Infrastructure Trust (SGX:A7RU) announced steady distribution of S$0.0186/unit for 2H20, bringing FY20 full year distribution to S$0.0372/unit, at par with FY19.
• The key positive for FY20 is the 20% y-o-y increase in distributable cash flows or free cash flow to equity (FCFE) for Keppel Infrastructure Trust’s unitholders. This came in at S$226m for FY21 vs S$189m for FY19, largely on the back of better than expected contributions from Ixom. This meant that payout ratio was down to 82% for FY20, from 93% in FY19, and significant distribution reserve buffer of almost S$40m was thus built up in FY20. This can be used to shore up future distributions, especially when some of the existing concessions expire during the 2024/25 timeline.
• There were no operational disruptions at any asset in Keppel Infrastructure Trust’s portfolio in 2020, demonstrating highly resilient and stable operations amid the pandemic.

Headline Losses From Basslink Related Provisions and Write Offs

• Keppel Infrastructure Trust reported loss attributable to unitholders of S$79.5m in 2H20 and S$34.4m in FY20. However, excluding the impact of one-off items amounting to S$93.7m recognised in 2H20, core net profit would have amounted to S$14.2m in 2H20 and S$59.3m in FY20, a significantly better performance than FY19.
• The one-off items included
  1. S$0.8m acquisition related cost incurred for Ixom’s acquisition of Medora,
  2. S$16.7m loss on divestment of Ixom’s non-core Latin America and China Life Science businesses, and
  3. S$76.2m provisions and writedowns at Basslink related to the conclusion of arbitration provisions which resulted in penalty payable to the State of Tasmania and write offs of receivables.

Conclusion of Basslink Arbitration Removes An Overhang

• While Basslink arbitration has been decided by the arbitrator in favour of the State of Tasmania and against Basslink, requiring Basslink to pay damages of A$38.5m in relation to the cable outage of December 2015, we reckon things could have gone worse than this.
• Going forward, Basslink will probably have to come up with a deferred payment solution for the penalty, after negotiations with its counterparty and its lenders. In any case, there is no contractual recourse to Keppel Infrastructure Trust for either the penalty or for Basslink’s financing arrangements, so this should be the end of negative newsflow relating to Basslink for now.

Another Well Timed Acquisition Extends Visibility of Distributions

• In December 2020, Keppel Infra Trust announced the proposed acquisition of an 80% stake in Philippine Coastal Storage & Pipeline Corporation (PCSPC), which owns and operates the largest petroleum products import storage facility in the Philippines. PCSPC is strategically located in the Subic Bay Freeport Zone, which has a natural deep harbour for access by oil refiners in rest of Asia and is well connected to major demand areas of the Luzon region, including Metro Manila.
• With an expected storage capacity of approximately 6 million barrels by early 2021, PCSPC accounts for approximately 36% of total import terminal capacity in the country. We believe it fits well in Keppel Infrastructure Trust’s portfolio as it qualifies as a critical infrastructure business (demonstrated by the fact that it continued to operate at high capacity throughout recent lockdowns) and a large majority of contracts are on take or pay basis which ensures reliability and predictability of cash flows. There is no exposure to petroleum price and volume risk.

Deal Pricing Reflects Strong Growth Potential

• The consideration for the acquisition is roughly S$357.6m (US$267m) for the 80% stake. Keppel Infrastructure Trust has entered a S$300m unsecured bridge loan facility to finance the transaction, which will be repaid using a combination of equity and debt capital market issuances at an appropriate time over the next two years.
• We reckon the purchase price implies around 15x historical EV/EBITDA, based on FY19 numbers, which is higher than the multiples involved in Keppel Infrastructure Trust’s Ixom acquisition, but is probably justified by the higher embedded growth opportunities in the PCSPC deal.
• Demand for imports of key petroleum products in the Philippines is expected to grow at around 4% CAGR over the next 10 years on conservative estimates and given the storage capacity shortfall expected, storage rates can also be expected to rise over time. PCSPC has more than doubled its capacity over the last 10 years (10% CAGR in capacity over 2011-20) and has future expansion plans in place to capture the projected long-term growth potential.
• Proforma distributable cash flows from the asset would be around S$7.0m in 1H20, or 5.5% of existing cash flows. This should help smoothen out distributions from the Trust over time and lengthen its effective portfolio life.

Balance Sheet Should Remain Healthy Despite Acquisition

• Net leverage (net debt/ asset) for Keppel Infrastructure Trust has declined to 32% at end-FY20 from 41% at end-FY18. Net debt/ adjusted EBITDA has similarly improved from 5.5x to 4.2x over the same time frame. This has put Keppel Infrastructure Trust on a firm footing for the future.
• Factoring in debt for the above transaction, net leverage (net debt/ asset) would increase to around 38% and debt/ EBITDA should remain flattish, by our estimates. These are still well within tolerable limits and Keppel Infrastructure Trust could even look to lever up to 40-45% if further M&A opportunity arises.

Maintain BUY With Higher Target Price of S$0.61

• Considering the better than expected cash flows from Ixom, our DDM-based target price for Keppel Infrastructure Trust is raised to $0.61.
• Overall, we still remain positive on Keppel Infrastructure Trust because
  • unlike REITs, there is no risk to annual DPU forecast as distributable cash flows are significantly immune to economic cycles, and
  • management continues to deliver on acquisition promise for a diversified and enhanced asset base, with a focus on extending the life of distributions.
• Keppel Infrastructure Trust's attractive DPU yield of ~6.8% at current price is higher than most top tier REIT/ business trust peers in the Singapore market and carries little downside risk in the near term.

Source: DBS Research - 28 Jan 2021