Fair value: SGD1.06 - SGD1.13
Date: October 16, 2013
3Q Results in Line, Profit Margin Remains Higher
• Little change in our fair value and profit estimates. We keep our profit and fair value estimate for KGT largely unchanged following 3Q profit performance that was in line with our expectation. We see little risk to potential dividend per unit of SG 7.8 cents payout over the next 12 months, which leaves KGT’s dividend yield at a relatively attractive 7.7% vs. the FSSTI average of 3.2% and in line with other infrastructure trusts in Singapore.
• Revenue and profit are stable. 3Q13 revenue of SGD17.1 mln is stable (+0.3% YoY, +1.9% QoQ) while net profit of SGD3.8 mln is up 7.4% YoY, but down 1.6% QoQ. The slightly lower QoQ profit is mainly due to an uptick in electricity costs. We do not think the slightly higher electricity cost is anything to worry about as this has swung from quarter to quarter, reflecting fuel cost and usage variations – the bulk of which is passed through to customers.
• Continues to benefit from lower electricity cost. To recap, KGT’s operating profit margin has improved by 300-400 bps since 1Q13, following its annual electricity contract adjustment and from cost savings from the solar panel installation at its Ulu Pandan plant. According to KGT, lower output of NEWater also partly explains the 16.2% YoY decline in electricity cost for the cumulative nine months.
• 2014 outlook to remain benign. We expect Singapore GDP to grow around 2.5%-3.0% in 2014. Hence, in the absence of any acquisitions or new plant projects, we see KGT posting limited revenue growth of 1.7% in 2014. Operating profit margin is assumed to be stable at 22% as we see contained cost pressures. Given sluggish global demand growth and a surplus of crude oil in the U.S. we expect global oil & gas prices to remain stable. As such, we expected limited variation to KGT’s underlying business performance.
• There is limited variation to KGT’s revenue growth as the bulk of its revenue is derived from fixed payments from PUB. This comprises fixed capacity and operating & maintenance (O&M) income at the three plants: Senoko and Tuas Wasteto- Energy facilities and the Ulu Pandan water treatment plant.
• As the O&M payments are linked to an inflation index, growth may be adjusted from time to time depending on the expected inflation pressure. Also, KGT receives a variable income if demand exceeds the contracted output.
• Given our expectation for Singapore’s GDP growth to hover around the 2.5%-3.0% level over these next two years, we see limited fluctuation to KGT’s revenue in the absence of any acquisition, expansion and/or extraordinary plant shutdowns.
• KGT’s operating margin has risen by 300-400 bps since March 2013 to 24.0% and 23.1%, respectively, in 2Q13 and 3Q13. The increase reflects the impact of lower electricity costs following an annual electricity tariff adjustment, lower NEWater output and cost savings from the installation of solar panels at the Ulu Pandan plant.
• Looking ahead, we expect KGT to maintain a decent operating profit margin of around 22%, given our expectation for cost pressures to be benign for the next 12-18 months.
• Interest rates are anticipated to trend higher but given the company’s net cash position (SGD28.5 mln as of 3Q13) and no debt, this is anticipated to have a limited impact on KGT’s profitability. Interest income may be slightly higher, but this only makes up 0.4% of pretax profit presently (3Q13).
• We maintain our view that KGT’s bottomline is likely to remain stable, with net profit at around SGD14.5 mln- SGD14.6 mln in 2013 and 2014. Given relatively slow growth in Singapore, we think opportunities to raise revenue through increased variable income may be limited. As such, we do not expect much variation to KGT’s profit.
• Similarly, cash flow remains healthy and stable with no debt and limited capex spending expected. Hence, DPU should be comfortably maintained at SG 7.8 cents.
Our fair value estimate for KGT remains at SGD1.06-SGD1.13. Our assumption for KGT to maintain its DPU at SG 7.8 cents until 2024, followed by a gradual reduction thereafter, underpins our valuation of the company. The low end of our value estimate assumes that the Senoko Waste-to-Energy concession is not extended beyond 2024. The higher end of our estimate assumes a five year extension. This remains possible given that the plant is likely to remain viable, although some upgrades may be undertaken.
We are discounting KGT’s DPU at a cost of equity of 7.3%. This assumes a risk free rate of 3.0% and a market risk premium of 6.1%. KGT’s beta has so far been relatively low at 0.4x but we use regional peer group (power utilities) beta of 0.7x given KGT’s relatively shorter listing history. We note that its closest peer, CitySpring Infrastructure Trust, has a beta of 0.6x. Hence, a lower discount rate could be defended but we think this may have limited impact as KGT’s share will also be bound by its comparison to peer group ratios. Its comparatively lower ROE of 2.2% limits upside to its PBV of 1.0x, in our view.
Source/Extract/Excerpts/来源/转贴/摘录: S&P Capital IQ Equity Research
Publish date: 16/10/13