• 3Q22 distributable income boosted by maiden contribution from Aramco Gas Pipelines asset, on track to steady DPU growth in FY22
• Recently announced transactions will boost cash flows and DPU further in FY23
• Business model is fairly recession proof and inflation proof; interest rates will creep up over time but not a material dent
• Maintain BUY with TP of S$0.63, attractive yield in excess of 7%

Distributable income in 3Q22 boosted by addition to asset portfolio

• KIT recorded distributable income of S$50.1m in 3Q22, up 12% y-o-y and 17% q-o-q, largely due to maiden contribution from Aramco Gas Pipelines Company stake
• This was on the back of 13% y-o-y increase in 9M22 adjusted EBITDA to S$270.1m
• City Energy (previously City Gas) numbers normalised after a weak 2Q, given the timing differences in the fuel price pass through gas tariff mechanism. 
• KMC numbers were weaker than usual owing to an unplanned outage during the quarter which affected availability and hence, revenues
• Contribution from Philippine Coastal was negative owing to high capex incurred to convert tanks for storage of higher demand economical grade gasoline, which is a one off event
• Weaker contributions from KMC and Philippine Coastal was more than offset by Aramco Gas Pipelines Company, which contributed S$8m in first quarter of distributions, higher than expected run rate owing to some-one offs
• Ixom continued to perform well and added another bolt-on acquisition in New Zealand
• Given these results, management should be able to retain in 2H22 the DPU growth story started in 2H21, as underlying businesses are performing well, City Energy contributions smoothen out, and new assets start contributing
• Management expects to grow DPU by at least 1.5-2% every year, beating long term inflation trends in Singapore. DPU growth next year could be more exciting than that, with new acquisitions coming in, as described below. 

AUM growing from S$4.6bn to S$6.1bn shortly

• The last quarter has been very eventful for KIT in terms of growing its portfolio, with 3 acquisitions announced: 1) 13.4% minority stake in European onshore wind platform (~S$192m), 2) 20.5% minority stake in BKR2 - German offshore wind farm (~S$365m) and 3) 52% majority stake in EMKH – integrated waste platform in South Korea (~S$346m).
• Initial completion of European onshore wind platform and EMKH has been completed in September and October 2022, respectively, the BKR2 investment is likely to be completed by the end of 2022. 
• KIT’s AUM (including minority interests) is expected to grow almost 30% from S$4.6bn to S$6.1bn following completion of these transactions, which should all start contributing to distributable cash flows by middle of 2023. 
• According to management proforma estimates, the 3 acquisitions combined would boost distributable cash flow by around S$72m, or 36% compared to FY21 distributable cash flow level. Impact to DPUs would be lower, owing to the impact of acquisition related costs, management fees, and likely dilution to unitholder base with the issuance of new units to fund the acquisitions. 
• KIT is also leveraging on sponsor pipeline by signing a term sheet to acquire a 50% stake in the Keppel Marina East Desalination Plant, which is structured so as to give KIT 100% economic interest in the asset. Enterprise value of the deal is around S$355m, but equity investment will be lower owing to significant debt in capital structure at asset level. The plant is of similar size to SingSpring and should contribute upwards of S$10m in distributable income per annum, according to our estimates. KIT expects to sign definitive agreements in 4Q 2022, subject to authority approvals. 
• In addition, KIT had earlier signed an MOU with Jinko Power of China to jointly explore solar farm and energy storage projects. Jinko Power will over time identify up to 1,000MW of developmental and operational assets in key developed markets of APAC, Europe and the Middle East for KIT’s consideration. While no investment has yet been identified, this is in line with KIT’s target to increase exposure to renewable energy by up to 25% of KIT’s equity-adjusted AUM by 2030. With the European wind farm investments, exposure has gone from zero to around 10% already. 

Equity fund raising not imminent, rising interest rates not a big concern 

• KIT finds itself in a slightly tricky situation of having to arrange financing for acquisitions/ investments in a rising interest rate environment, but so far, there are no major issues.  
• To finance the acquisition of the Aramco Gas Pipelines stake, KIT had earlier issued a tranche of S$250m MTNs in 1H22
• For the 3 acquisitions mentioned above, management would ideally want a mix of debt and equity, but given weak equity markets, equity fund raising plans have been pushed further down the line, and KIT has secured a bridge loan facility worth S$290m to partly fund the acquisition of EMK. 
• Gross cash reserves have also declined from S$817m at end-FY21 to S$442m at end-9M22 to partly fund the other investments.
• Net gearing (debt/ asset) is rising owing to deployments and is at 33.6% as of end-9M22, up from 31.2% at end-1H22 and 22% at end-FY21. This is still very reasonable level and implies S$500m+ headroom before gearing hits 45% level, which is the SREIT benchmark. Of course, business trusts like KIT have no regulatory limit and can lever up more, if required. Net debt/ EBITDA of 4.3x is also no cause for concern. 
• KIT is currently undertaking a strategic review of its 100% stake in Ixom, with a view to potentially unlocking value from the business through divestment at attractive valuations. Target completion is by 1H 2023, and capital will be redeployed for growth. This can be used to repay bridge loans in case capital markets are still weak. This should enable the Trust to boost distributable income over the next few years and more than offset cash flow loss from expiring assets like Senoko WTE plant (2024) and SingSpring (2027). 
• Weighted average interest rate right now is around 2.7% (up from 2.5% as of end-1H22 as new loans come in an inflationary environment) and weighted average term to maturity  of loans is 3.0 years. KIT has hedged ~90% of its loans. With 90% hedge in place, a 100 bps change in interest rate would have around 1% impact to distributable income, according to management estimates. Thus, we could expect 1-2% impact or S$2-4m impact to distributable income per annum from increasing interest rates, which would not be material, given KIT’s gross cash balance > S$400m, which can be used to smoothen distributions. 

Given steady delivery of DPU increases (we expect 2% growth to 3.90Scts full year DPU for FY22 from 3.82Scts in FY21), low impact from high interest rate environment, Basslink concerns mostly behind us, and chances of bigger DPU accretion in FY23 on the back of inorganic growth, KIT, with a yield of 7.3% at current prices, continues to look attractive. Its business model is fairly recession proof and independent of economic cycles as evidenced by steady distributions throughout pandemic years, and energy cost inflation can be mostly passed through. Maintain BUY with TP of S$0.63.

ANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate[1] does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests[2]  in relation to an issuer or a new listing applicant that the analyst reviews.  DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports.  The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately.  There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS'') or their subsidiaries and/or other affiliates have proprietary positions in Keppel Infrastructure Trust, recommended in this report as of 30 Sep 2022.

Compensation for investment banking services:

2. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

Disclosure of previous investment recommendation produced:

3. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed on page 1 of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

[1] An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 

[2] Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis.  This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.