On 26 July 2024, Keppel Infrastructure Trust (“KIT”) announced their half year result for FY2024. Their distributable income has seen a notable decrease, though currently it is still able to sustain their dividend payout through operations. However, this means that KIT continues to pay out of EBITDA, resulting in the continued decrease in Net Asset Value (“NAV”) and increase in gearing over the last few quarters.
Subsequent to results announcement, on 2 August 2024 KIT have announced the issuance of SGD200 million subordinated perpetual securities. This has been completed at the date of this article.
Website: Financial Statements And Related Announcement::Half Yearly Results
Photo source: https://www.kepinfratrust.com/
Background
KIT is the largest diversified business trust listed in Singapore. KIT’s portfolio comprises strategic businesses and assets in the three core segments of Energy Transition, Environmental Services, and Distribution & Storage. These businesses and assets provide essential products and services across a broad range of industries; and generate regular and resilient cash flows, with potential for growth that is supported by favorable long-term market dynamics and demand. This is in line with KIT’s long-term goal of delivering sustainable and growing returns to Unitholders, through a combination of recurring distributions and capital appreciation.
Keppel Infrastructure Fund Management Pte Ltd (“KIFM”) is the Trustee-Manager of KIT. KIFM is a wholly owned subsidiary of Keppel Capital, a premier asset manager with a diversified portfolio in real estate, infrastructure, data centres and alternative assets in key global markets.
Keppel Infrastructure Holdings Pte. Ltd., a wholly owned subsidiary of Keppel Corporation Limited, is the Sponsor of KIT.
Key Metrics
Distributable Income
| Metrics | Current | Previous |
|---|---|---|
| Distributable Income | -31.5% | -29.1% |
Distributable income for the first half of FY2024 decreased by 31.5% to SGD90 million. Management have disclosed that DPU would increase by 2.1% if adjusting for the one-offs. However, it does not change the fact that these one-offs do affect KIT during this period. Across the different segments, it was noted that expenses have increased therefore resulting in lower distributable income, something unit holders should be concerned on. This metric is Unfavorable.
Gearing Ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 44.7% | 41.1% |
Gearing ratio increased to 44.7% as of 30 June 2024. The increase this quarter was due to a large drawdown of borrowings, with a total debt of SGD3,300 million as of 30 June 2024 compared to SGD2,700 million as of 31 March 2024.
Although KIT is not subjected to the same gearing requirements as REITs, the MAS rule is a safeguard to prevent the REIT from being overleveraged, which will help to protect investors capital. Using the REIT benchmarks, this metric is Unfavorable.
Interest Coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 0.9x | No Info |
If using the same computation as REITs (EBIT/net interest expense), as of 30 June 2024 the EBIT of the trust is SGD79 million while finance costs is SGD88 million. This translates to interest coverage of 0.9 times and therefore there is insufficient interest coverage. While they generate sufficient cash flows to pay the interest, profits are not sufficient to cover the interest expenses comfortably. The overall metric is Unfavorable as the interest coverage is lower than my preference of 3.0 times and may worsen.
Debt Maturity Profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 3.9 years | 3.1 years |
Weighted average term to maturity of their debt lengthened to 3.9 years as of 30 June 2024. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 3.10 | 3.00 |
The Price to Book (“P/B”) ratio currently stands at 3.10. This is computed using the closing share price of SGD0.455 on 28 August 2024 and the net asset value per share of SGD0.147 as of 30 June 2024. The P/B ratio is Unfavorable as there are other business trusts, such as CapitaLand India Trust (SGX: CY6U) and NetLink NBN Trust (SGX: CJLU), which have lower P/B ratios.
Dividend
| Year | Yield | Total |
|---|---|---|
| 2024 | 7.93% | SGD 0.036 |
| 2023 | 15.69% | SGD 0.071 |
| 2022 | 8.42% | SGD 0.038 |
| 2021 | 8.18% | SGD 0.037 |
| 2020 | 6.13% | SGD 0.028 |
| 2019 | 8.18% | SGD 0.037 |
In 2023, there was a special distribution of SGD0.0233 per share. This resulted in the total dividends for the calendar year to increase to SGD0.071 per share and a dividend yield of 15.69%.
As prudence, with the dividend payout of SGD0.0195 per share in August 2024 based on operations, it is more likely to assume that the distribution was to maintain at SGD0.0390 per share each calendar year excluding any special distribution. With a closing share price of SGD0.455 as of 28 August 2024, this translates to a healthy 8.57% dividend yield and looks to be sustained using distributable income in 2024. For my benchmark, a general reasonable yield would be around 5.75% in the current environment, and KIT have been consistent throughout the years within the expected range. The dividend yield is Favorable.
Website: Reasonable Dividend Yield 2024Q3 – 5.75%
Do note there are differences in yield for 2024 and 2020. 2024 was due to the first payout in 2024 was only for 2023Q4 and there is an upcoming earlier payout in September 2024. The amount for 2023Q3 was paid out earlier with the special distribution. 2020 was due to the change in dividend payout policy from quarterly to semi-annually. There was thus no payout in September 2020. They have not missed their dividend payments since 2016.
Key things to note
Growing towards asset light
KIT has a wide range of plants and operations. By no means it is an asset light Company. However, from an accounting point of view, they have been paying out dividends that are higher than their earnings. This is possible because of the high depreciation, which is a non-cash adjusting expense, resulting in high EBITDA as compared to profits.
For illustration purposes, imagine a scenario where you are in the business of car rental. The useful life of cars in Singapore companies are generally 10 years. This is due to the Certificate of Entitlement (“COE”) lasts only 10 years, and the value of the car is thus depreciated over its 10 years useful life. However, over the course of the 10 years, at the end of the useful life with the expiry of the COE, you will need to pay an equivalent amount to purchase a new car with a new 10-year COE. The new purchase would not be possible if you pay out dividends based on EBITDA and have no cash savings from the dividend expense.
What management is saying is that the assets of KIT do not have a high replacement cost at the end of its useful life. and the assets will still be able to continue to operate indefinitely. Thus, they do not need to save money from the depreciation expense for a potential replacement of the assets.
The result is that the net asset value of the Company will continue to decrease as they continue to pay out the dividends sustained using EBITDA. Eventually if they would like to secure new financing, their balance sheet will seem to have insufficient assets to pledge as collateral for new borrowings.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distributable Income | -31.5% | Unfavorable |
| Gearing Ratio | 44.7% | Unfavorable |
| Interest Coverage | 0.9x | Unfavorable |
| Debt Maturity Profile | 3.9 years | Favorable |
| Price to Book Ratio | 3.10 | Unfavorable |
| Overall | Unfavorable |
Overall, the fundamentals of KIT have continued to worsen and remains in Unfavorable territory. Their net assets continue the decreasing trend as the dividend payout continues to be based on EBITDA. This overall resulted in a continued high gearing and P/B ratio. Investors will have to ensure that they are comfortable with how the financials operate, especially as management continues to be aggressive with their expansion plans.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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Website: Keppel Infrastructure Trust (SGX: A7RU): 2024 First Quarter Business Update
