Keppel Infrastructure Trust (KIT) has begun pre-marketing Singapore's first major equity deal of 2015, targeting funds of up to S$525 million ($394 million).
The Singaporean equity market has been subdued for the past four months, as foreign investors turned net sellers across the Asean region and shifted funds north into Hong Kong, China, Taiwan and Korea.
The last major deal from the Lion City involved another Keppel asset; the initial public offering of data centre manager Keppel DC Reit at the end of last year. However, the stock has performed reasonably well since its December 12 trade date, rising 11.8% compared to a 4% increase in the Straits Times Index over the same period.
KIT is raising new funds as part of its merger with a second listed trust, CitySpring Infrastructure Trust and proposed acquisition of a 51% stake in a 1,300 MW gas fired power station called Keppel Merlimau Cogen from Keppel Infrastructure. The power station transaction is valued at S$510 million based on an S$1.7 billion asset value and S$700 million in debt.
Joint global co-ordinators of the equity deal are Credit Suisse and UBS, which advised KIT on the merger, plus DBS, which advised CitySpring. Pre-marketing began last Wednesday in Singapore and formal book building is likely to open the week beginning May 18, according to a source close to the transaction.
There will be an institutional tranche accounting for about 90% of the deal and a non-renounceable preferential offer to major shareholders for the remaining 10%, subject to oversubscription ratios. The entire offering will comprise about 25% to 30% of the company's enlarged share capital and existing major shareholders Keppel Corporation and Temasek will hold respective stakes of about 20% and 17%.
The merged entity, which will be called KIT, has been assigned a fair value of S$1.8 billion to S$2.07 billion ($1.35 billion to $1.56 billion). This market capitalisation range will offer investors a forward dividend yield of 7% to 8%.
The company is set to pay out S$145 million in dividends for the 2015 financial year, equating to a dividend per unit (DPU) of 3.7 cents.
This dividend distribution level is forecast to remain constant across the 2015 and 2016 financial years, which means the pay-out ratio will need to rise from 77% to 80% given that distributable cash flow is projected to drop from S$188.4 million to S$181.8 million over the same period. The remaining 20% of income is being retained for future acquisitions and balance sheet management.
Valuation
One source close to the deal said investors are already honing in on a forward dividend yield above the 7.5% mark. Governments bonds are currently trading around the 2.25% level, which means KIT will offer an additional 525bp if it is priced around this level.
In terms of listed comparables, it will provide a roughly 100bp pick up to the S-Reit industrial average of 6.6%. A-Reit and Mapletree Industrial Trust are respectively yielding 5.96% and 6.63%
Compared to the wider S-Reit average of 6%, KIT could end up paying more than 150bp in additional yield. At the far end of this scale are Hutchison Ports Trust and Asia Pay TV, respectively yielding 8.58% and 9.52% based on Friday's closing prices.
Following its merger, KIT will rank as Singapore's second largest infrastructure business trust by assets after Hutch Ports.
KIT needs to offer a fairly chunky dividend. This will partially offset the risk of rising interest rates and partially compensate for the lack of substantial organic growth. Future DPU growth will depend on acquisitions, which management have told investors they are open to.
On a 2015 EV/Ebitda basis, the fair value range spans 11 to 12 times.
Assets
The merged entity has an asset value of S$4 billion and eight major assets. In the immediate pipeline is the 49% stake of the Merlimau Cogen power plant, which KIT does not already own and additional waste treatment plants, which could add a further 5% to earnings on an annual basis.
Prior to the merger, KIT's existing portfolio comprised two waste incineration plants, Senoko Waste and Keppel Seghers Tuas, which have concessions through to 2024 and 2034. It also has one of the largest waste water re-cycling plants in the region, Ulu Pandan NEWater, which has a concession out to 2027.
CitySpring's existing portfolio comprises five very different assets. Singapore-based City Gas is the country's sole producer and retailer of town gas, with an existing customer base of 700,000.
Clients are growing by a compound annual growth rate of 2%, one of main organic growth drivers for trust over the next few years.
It also owns: seawater desalination plant SingSping, which has a water purchase agreement through to 2025; Basslink, which provides an electricity connection between Australia and Tasmania through to 2031 with a potential extension to 2046 and; CityNet, which owns a fibre network in Singapore. This is due to expire in 2016.
In terms of assets, the current portfolio has a breakdown of: 43% power assets, 25% electricity transmission, 13% waste management, 12% gas and 7% water treatment. By geography 75% of the assets are in Singapore and 25% in Australia.
One new growth driver in 2016 will be DataCentre One in Singapore. This has a gross floor area of 214,000 square feet and a 20-year concession with an option to renew for a further eight years. Its major client will be 1-Net, a subsidiary of Mediacorp.
Over the first few years it is expected to generate income of about S$6 million per year.
Financials
The Keppel group is hoping the larger size of the combined trust will make future acquisitions easier by bringing down the cost of capital. The equity deal has also been structured to move the focus away from retail investors and improve liquidity.
However, future fundraising activity is somewhat constrained by the merged group's proposed gearing. In 2015 net debt/Ebitda is forecast to stand at 5.3 times, rising to 5.6 times in 2016 because of declining unit holders funds. Net debt is expected to total S$1.5 billion in 2015.
KIT's debt maturity profile is also quite lumpy with redemptions spiking in 2019 and 2020. Its blended average interest rate stands at 4% to 5%.
Revenue is forecast to decline from S$716 million in 2014 to S$691 million in 2015 before rising to S$711 million again in 2016. The fall is 2015 is being attributed to lower gas tariffs, which will bring down revenues at City Gas from S$389.8 million to S$365.2 million.
However, Ebitda is forecast to rise from S$280.4 million to S$294.3 million over the same period.
Selling points
On the plus side, the trust gives investors exposure to strategic assets across Singapore and offers a play on future infrastructure growth. The Keppel group's experienced management team also makes accretive acquisitions more likely.
The group has also said that the merged entity should further lead to savings on trustee management fees.
It is also likely to argue that investors should be comforted by the group's long-term concessions, many of which are contracted with government-linked entities or Keppel group companies. Many of its cash flows are also availability based, which means they do not depend on economic activity to generate revenues.
Under the terms of the merger, existing KIT unit holders are getting 2.106 CitySpring units for every one unit they hold. CitySpring is paying out a one time distribution of S$30 million to unit holders prior to the equity fundraising, while the merged trust will pay out a further S$30 million to unit holders of the enlarged trust prior to the equity fundraising.
