Okay – technically, not a Singapore REIT. Keppel Infrastructure Trust is a business trust.
What’s the difference? Well, unlike a REIT, a business trust is not limited to owning properties but can own most types of assets. A business trust doesn’t have a gearing ratio limit and isn’t required to distribute 90% of its profits as dividends.
That aside, I’ve received quite a few queries — both from readers and my Diligence members — on Keppel Infrastructure Trust. And I finally got down to writing this.
The last time I wrote about it was here.
Keppel Infrastructure Trust shares have recently tumbled, which makes it very interesting now, because shares currently trade at a 7.8% dividend yield.
Sounds pretty juicy… would I buy this? Let’s dive in.
Keppel infrastructure Trust – a different Singapore REIT
It’s rare to see a business trust that owns energy assets across different countries. After Cityspring Infrastructure Trust restructured into Keppel Infrastructure Trust in 2014, what I like about this business trust is its diversified income sources – assets are located across different regions, in different energy sectors:
- Australia – 35% of total assets
- Saudi Arabia – 32%
- Singapore – 23%
- South Korea – 6%
- The Philippines – 4%
This means assets aren’t affected by one business cycle, in a single country, in a single sector. What drives these assets’ value is its long-term contracts.
I like this, since it provides predictable earnings.
Keppel Infrastructure Trust owns City Energy, Keppel Merlimau Cogen Plant and other waste plants in Singapore. But its crown jewel of the entire portfolio is really Ixom – a major Australia chemicals business it bought just before the Covid-19 pandemic. Ixom sells to many blue-chip companies and municipalities – again, strong recurring profits.
Unlike energy assets typically locked into “long-term fixed pricing”, Ixom sells chemicals at market prices. Put it this way, Ixom makes more profits when chemical costs go up. But it probably won’t do so well when chemical costs drop.
This provides the business trust with potential profits in a highly regulated energy business.
So… why did Keppel Infrastructure Trust shares tumble?
Its shares are historically enduring. This is because of steady distribution payouts over the past years.
Even during the pandemic, shares have rebounded from its low of 42 cents to 53 cents per unit in just two months.
The problem comes when interest rates start roaring. Put it this way, Keppel Infrastructure Trust is like a Singapore REIT – it actively borrows money to buy higher yielding assets. However, with higher rates lately, the market became fearful of such a business model.
The result? Shares fell 14% since the start of this year.
So far, I’m not concerned with the trust’s high gearing ratio. Keppel Infrastructure Trust manages its debt repayments well. Its biggest debt repayment only comes in 2027.
And the good thing is, interest rates work in a funny way. It shoots up like a rocket but often drops like a feather. It will take time for rates to come down. However, by 2027, I expect rates to have already fallen back to a more acceptable level for the business trust.
Now, what I’m worried about though, is the S$555 million loan to be repaid next year…
It’s not a big loan, but not small enough to ignore either. This is because Keppel Infrastructure Trust is already paying a hefty 3.8% interest cost. And repaying next year’s loan could potentially raise its higher interest payments.
The good news is, it’s lowering gearing ratio to avoid paying more interest. Recently, it raised $300 million through private placement and preferred shares. And have paid down $436 million of loans.
If you ask me, I don’t exactly like this, since raising equity is more expensive than borrowing debt. But in this current environment, it’s probably a necessary evil.
The big concern for any utility-related assets is always… concession agreement. Especially some of its Singapore assets’ contracts will end in a few years.
Management has said it’s aware of the issue and taking steps to solve this – whether diversifying to other new assets, or extending the contracts. While it seems management has it under control, for any defensive investor, the uncertainty is usually worrying.
This could end abruptly, which may lower distributions, if it doesn’t continue or profits might be lower upon renewal.
The big question — is Keppel Infrastructure Trust a buy?
Disclaimer – I don’t own Keppel Infrastructure Trust.
Here’s what I think. If you’re okay with the above concerns, Keppel Infrastructure Trust is a solid dividend payer. In fact, during the pandemic, it steadily maintained its payout ratio.
Last year, it paid 3.84 cents per unit dividends. At current prices, that’s a 7.8% yield. Not too bad.
Even if higher interest costs eat into Keppel Infrastructure Trust’s profits, I think current high yield provides a sufficient margin of safety for a conservative investor. What’s more, this business trust adds a sweet diversifier to a Singapore REIT heavy portfolio.
My final thoughts
Like I’ve said earlier, Keppel Infrastructure Trust dividends are probably more resilient to economic crises. Energy assets are critical functions of any country.
Don’t forget, these infrastructure assets in some ways, also benefit from higher inflation. For instance, higher energy costs can be passed on to consumers. Think about this business trust too.
When it comes to stock picking, I’d first look at my asset allocation of my portfolio. If I’ve enough stocks allocated to a single country, or a single sector, I might only add a tiny position of a stock. This goes the same for Keppel Infrastructure Trust.
If I’ve owned stocks with safer, higher dividend yield, then I’ll only add a small position to Keppel Infrastructure Trust.
This is something which you probably want to keep in mind.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan