BEANSPROUT initiated coverage on Keppel Infrastructure Trust (KIT) with a “buy” call, noting the trust’s “attractive” distribution yield amid robust infrastructure assets.
The investment insights platform licensed by the Monetary Authority of Singapore issued KIT a target price of S$0.59, based on a weighted average cost of capital of 9 per cent and terminal growth rate of 2 per cent.
In a report on Friday (Jun 14), analyst Peggy Mak said the valuation is based on the assumption that KIT does not acquire new assets and calls for fundraising exercises.
She estimated that at the target price, KIT’s distribution yield would be 6.6 per cent for FY2024 and 6.9 per cent for FY2025. The counter is currently trading at an estimated distribution yield of 8.5 per cent for FY2024 and 8.9 per cent for FY2025.
Noting that KIT invests in infrastructure assets that provide stable cash flows, Mak projects that its distribution per unit (DPU) will grow in the next two years – buoyed by contributions from both current and newly acquired assets.
These contributions included a resumption of distribution from Keppel Merlimau Cogen Plant, which stopped contributing cash flow as the amortisation of its debt became effective.
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Following the extension of the capacity tolling agreement for the combined cycle gas turbine power plant till 2040, which allows debt to be repaid over a longer term, she expects KIT to record an additional S$23.8 million in distributable income and S$73.7 million cash flow.
Additionally, Mak estimates that KIT’s German solar portfolio would generate a “stable” full-year contribution of S$24 million for the current fiscal year.
With the acquisition of Ventura Bus Operations in Australia expected to be completed in Q2 2024, Mak projects the asset to contribute S$8 million for FY2025.
The DPU projections, however, exclude the one-off special dividend paid in the last fiscal year.
Mak also likes the counter for its ability to optimise debt-equity mix to boost returns.
As at end-March 2024, the trust’s net gearing was 41.1 per cent, and total debt to total assets stood at 48.6 per cent, which was “well below bank covenants”.
“The average cost of debt, however, did edge up to 4.37 per cent in Q1 2024,” she added. “It may climb further as some lower-cost hedges roll off.”
Units of KIT were trading down 1.1 per cent or S$0.005 at S$0.455 as at 2.18 pm on Friday.
