LAST CLOSE: S$1.05
FAIR VALUE: S$0.780
No growth catalysts in sight
Nothing’s changed, KGT’s investment thesis remains unexciting. KGT’s Q213 results were slightly below our expectations largely on lower operation and maintenance income. Q212 net profit came in at S$3.9mil, which was 7.4% lower than our forecast. Of greater concern to us, however, is KGT’s continued decline in its NAV and low true cash flow yield.
Revenue Down 27% YoY, Net Profit Down 10.7% YoY. KGT’s overall revenue in Q213 was down 27% YoY but this was expected given the absence of construction revenue and lower finance income. In Q212, KGT received construction revenue for the flue gas treatment upgrade at its Senoko Waste‐to‐Energy Plant. This was completed in Q312. Finance income in Q213 was lower by 4.2% YoY and this downward trend in finance trend will persist going forward on the back of lower interest income from the declining service concession receivables.
Sliding NAV. KGT faces its first concession expiry on its Senoko Plant in 2024, with subsequent expiries on its Ulu Pandan Plant and Tuas DBOO Plant due in 2027 and 2034 respectively. These plants are recognized as service concession receivables, which represent the right to receive fixed and determinable amounts of payments over the concession period. As KGT receives fixed capacity payments from its customers namely NEA and PUB, and reduce its service concession receivables accordingly, this will translate into a decline in its NAV over time. To illustrate this point, we note that KGT’s NAV per unit declined from S$1.05 at end‐December 2012 to S$0.99 as at end‐June 2013.
Don’t be fooled by the 7.5% yield. KGT announced its half yearly dividend of 3.13 cents, payable in August 2013. While this represents a 7.5% yield, we stress that approx. 70% of this yield comprises a partial return of capital. This means that KGT’s true yield is only 2.25%. Any upside to this yield will have to come from acquisitions yet there could be significant execution risks in this regard given KGT’s lack of a track record in executing acquisitions. With limited catalysts in the foreseeable future, KGT’s investment thesis hardly excites us.
We reiterate our SELL call with a lower target price of S$0.78 (previous TP was S$0.80) on a higher risk‐free rate of 2.47% and lower equity risk premium of 5.03%.