KIT share price to fight to the end
Note: This article has been edited to incorporate clarifications from KIT.
Will Singapore’s largest infrastructure business trust, Keppel Infrastructure Trust (KIT share price), be the last man standing? Amid the violent upheaval in the stock market, it seems that KIT share price will fight to the very end.
On 10 March 2020, I wrote that KIT share price would be stung by the collapse of the oil price. Indeed, the following day, KIT share price collapsed from $0.51 to reach a crazy low of $0.36 on 19 March 2020. The meltdown prompted the management to conduct shares buyback to halt the collapse of KIT share price. By 3 April 2020, 4.75 million of KIT shares had been repurchased.
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Previously, I have pointed out that KIT share price has a strong correlation with oil price because it owns one power-plant, Keppel Merlimau Cogen (KMC) Plant, which has been making huge losses since the start of the oil slump in 2014. For full-year 2019, losses before tax for KMC amounted to $40 million, an increase from $33.6 million in last year.
KIT management has clarified that oil price fluctuations has no bearing on the performance of the Keppel Merlimau Cogen (KMC) plant. Under the 15-year Capacity Toll Arrangement (CTA) with Keppel Electric, KMC receives capacity payment from Keppel Electric for making available the full capacity of the plant. This capacity payment is paid monthly regardless of actual power production of the plant and does not vary with electricity demand. At the same time, the cost of fuel is borne directly by Keppel Electric. This has provided KIT with healthy and stable, as well as predictable cash flows every quarter.
In addition to the above, net loss relates to the depreciation and amortisation (D&A) expenses, which is typical of infrastructure assets like KMC. These D&A expenses are non-cash items, and do not affect distributions due to the tax-efficient Qualifying Project Debt Securities (QPDS) structure in place. In fact, you will see that the distributable cash flow from KMC in FY 2019 was relatively stable year-on-year at $42 million (FY 2018: $45 million).
Obviously with only one power-plant, the investment moat of Keppel Infrastructure Trust is not in the energy sector. Rather, the competitive edge lies in its water and waste business segments. In fact, the 2019 acquisition of Ixom, a supplier of waste water treatment and industry chemicals, had been a massive game-changer for the Group. To further strengthen the business, the Group finalized the acquisition of Medora Environmental on 4 February 2020. In this article, I will share my view on the potential impact of this acquisition on KIT share price.
Note that this is an opinion article and not meant to be a financial advice. Please do your due diligence or engage financial advisors before investing in the stock market. Furthermore, I am not vested and have never invested in KIT before. Whether KIT share price will surge or collapse has no impact on me. Thus, this article is not meant to induce readers to make any form of investment decisions.
KIT share price faces massive headwinds
In my opinion, the biggest challenge confronting KIT share price is not COVID-19. Despite the circuit-breaker measure, Singaporeans still need water, gas, electricity and waste treatment services to carry on their daily lives. So, the downside risks for KIT are minimal. Rather, the biggest risk should be the meltdown of oil price, which would cause KMC to incur more losses. To mitigate this risk, the management should be focusing growth in the more defensive water treatment segment.
Critics may argue that the saga of Hyflux had caused plenty of uncertainties for KIT share price in the last two years (Keppel Infrastructure Trust owns 70% in SingSpring Desalination Plant while Hyflux owns 30%). But it should be noted that the downfall of Hyflux was due to Tuaspring, an integrated water and power plant. The collapse of oil price in 2014 had caused the power plant operations of Tuaspring to be untenable for Hyflux. Thus, in a water scarce country like Singapore, the business model of water treatment is still feasible.
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