This Keppel Infra Trust and CitySpring Merger

Past 2 weeks, there were rumours of Keppel Infrastructure Trust (KIT) and CitySpring Infrastructure trust (CIT) merging. The rumours turned out to be true when KIT will issue new units to CIT. CIT will pay out to their shareholders a one time distribution of 1.98 cents per unit. There after, all unit holders will receive 1.05 cents per unit held.

To complicate matters, the new entity, which will be called Keppel Infrastructure Trust, will call a rights issue to purchase a 51% stake in Keppel Merlimau Cogen which owns a 1300MW power generation facility on Jurong Island.

This is complicated. Perhaps more so to yield investors.

The two managers on both KIT and CIT tried to work out a deal that to both shareholders looks yield accretive on paper. Then they shoved one existing Keppel asset down shareholder’s throat.

KIT

I was a shareholder in KIT shortly after the IPO stage. I got invested, tried to do some due diligence and realize to my dismayed that this trust, which was sold as an ungeared infrastructure play basically contains 3 concessions that goes down year after year. You can check the concession in the financial statements to see their value during IPO and now.

A rough XIRR computation shows that although they are distributing 7% dividend yield, the XIRR over the lifespan is roughly 3% (if my memory still serves me well, which often isn’t). The rest of the 4% is paid out of asset.

The remarkable thing about KIT is that, despite this, the share price of KIT was largely stable. In terms of total return its not really too bad.  KIT’s largest concession asset, which produce the most cash flow, also is the shortest concession.

If you compare the service concession receivables at IPO, which is 587 mil, versus that of the latest quarter, which is 480 mil, you can see that it is indeed shrinking.  NAV shrank from $1.16 to $0.93. Thus I say its great the share price remain so stable.

Hindsight, you realize that all the Keppel spun-offs are clearly ways where Keppel Corp realize their less valued assets to spin off.  Its not just KIT, take a look at KREIT in the past as well.

The winner here clearly is the Keppel Corp share holders. Even this latest purchase looks more like an asset dump.

CIT

CitySpring IPO at 89 cents in 2007, and debut at 1.49. It traded well in that range but since then, results have been extremely disappointing.

Investors have been time and again seduced by high dividend yields in the region of 9%, and the idea of a sturdy high barriers to entry industry.  Since listing there have been 2 rights issue where capital was required to de-leverage its highly geared balance sheet.

It also acquired Basslink in 2007 to 2008 time frame on a 75-100% debt leveraged deal.  If you are getting something on leverage and you want to earn the spread, you better make sure that you can guarantee it will be accretive soon.

Basslink didn’t show the cash flow it was suppose to show and the business struggled partly because of it. The company got lots of debt to repay and not enough cash flow to show for it.

In recent times, things have been looking up for CIT in that they are moving towards setting up data centres a forward looking cash flow stream.

The important thing

Many would lament that business trust have not been as good of an investment as REITs. This is certainly evident if you take a look at the comparative yields on the Dividend Stock Tracker. My opinion is that, the retail, industrial and office property scene is in an environment much conducive to perform, and that they have adequate support to turn around even when they face issues. This is not so much for ships and other infrastructure assets for CitySpring.

The most important thing for shell businesses such as REITs, ship trusts, utilities trust, pipeline trusts, data centre trusts is that you have good managers that can grow the trust, but grow it within their capacity, taking the appropriate risk management.

The governance structure of trusts needs to be established because there is a bias locally not to view these trusts as strategic growth areas but more as a dumping ground. In that case why put your best men there. But governance can only do so much.

The trusts in USA does look as highly leveraged but perhaps they deliver the appropriate share holder returns as well.

Its not a problem with the structure of the shell, or the assets within. If the manager works for the shareholders, you know that even though you do not understand the asset that much (KIT could go out and buy a train for all I care), you know that they feel its conservatively accretive.

If you look at the track record of these 2 entities, they don’t give you that feeling. They may have learnt from their past experiences and you have a good manager, or perhaps you have insider knowledge that the man in charge is not what Kyith describe him to be, make sure you suss out the competency of the manager that its a right fit if you are to get invested. If you can’t do it, have a good reflection of their past management moves.

Else, this isn’t the only flower out there, take a look at other similar or higher yielding assets here. They may prove to be less of a headache and more value than this.