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A Look at a Dividend-Paying Infrastructure Business Trust

Keppel Infrastructure Trust (SGX:LH4U), formerly known as K-Green Trust, is a business trust with a mandate to invest in utilities infrastructure assets, primary and alternative energy assets, and other infrastructure assets.

The share price of the business trusthas underperformed since the launch of its Initial Public Offering (IPO) on 29 June 2010. As of 20 October 2014, its share price was trading approximately 8% below its IPO issue price of $1.13. By comparison, the capital gain returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was 11.3% for the same duration.

However, over the past four plus financial years, the business trust has distributed out a total of 30.9 cents. With the total distributions included, Keppel Infrastructure Trust pips ahead of the SPDR STI ETF. The latest earnings report for the business trust can be found here.

As Foolish investors, we should look behind the curtains to understand the “business behind the trust”.

A closer look

Currently, portfolio for Keppel Infrastructure Trust includes the Senoko Waste-to-Energy plant, the Keppel Seghers Ulu Pandan NeWater plant, and the Keppel Seghers Tuas Waste-to-Energy plant. All three assets have long-term concession agreements with Singapore statutory bodies namely, the National Environmental Agency (NEA), and the Public Utility Board (PUB). This provides stability in terms of revenue for the assets. The service period for concessions is summarized below for the three plants.

Plant Period of Concession Commencement Date
Ulu Pandan 20 years 28 March 2007
Tuas 25 years 30 October 2009
Senoko 15 years 1 September 2009

Source: Business Trust Introductory Document

The revenue for Keppel Infrastructure Trust can be divided into two business segments. The Waste Management segment consists of the Senoko and Tuas plant while the Water and Wastewater Treatment segment consists of the Ulu Pandan plant.

Keppel Infrastructure Trust Graph 1

Source: Business Trust earnings report

The financial year for Keppel Infrastructure Trust matches the calendar year. The revenue levels for 2013 has remain relatively unchanged since 2010. Revenue was up in the years in between but unfortunately, the revenue has come down in 2013. The Waste Management segment is the main contributor with 76.8% of revenue for 2013.

We would ideally like to see the revenue dollars drip down to the bottom line. For that, we look into the profitability of the business segments.

Keppel Infrastructure Trust Graph 2

Source: Business Trust earnings report

From the chart above, profits for the Waste Management segment has been pretty much stable in the past three years despite the fluctuation in revenue over the same time period. For 2013, the Waste Management segment made up around 87% of profits. For context, its Senoko and Tuas plant derives income from capacity payments, which has less correlation with economic or demographic fluctuations.

In contrast, income for the Ulu Pandan facility is derived from equal parts of capacity availability payments and NEWater output payments. Along with this, the production of NEWater is subject to demand from the Public Utilities Board (PUB). This could be why the profits for the Ulu Pandan plant has been more volatile.

As its business is basically a utility, we can also look at the operating cashflow and capital expenditure to gain some insight from the free-cash-flow for the company.

Keppel Infrastructure Trust Graph 3

Source: Business Trust earnings report

The free cash flow for Keppel Infrastructure Trust has been a little patchy, but generally positive for the past two years. However, its distribution pay-outs for 2012 and 2013 cost $49.3 million each year, which is slightly above the total free cash flow for the two years.

Finally, Foolish investors would look for the accumulated profits have to end up on the balance sheet in the end. To do this, we look at development of its cash and borrowings.

Keppel Infrastructure Trust Graph 4

Source: Business Trust earnings report

The business trust has remained debt free for the past four plus years. Unfortunately, the cash and cash equivalents has been steadily decreasing over the past four years. At the current level of cash and equivalents, it is possible that the business trust might need to find ways to raise capital if it wants to expand its portfolio of assets.

A quick look ahead

On 26 September 2014, Keppel Business Trust entered into an agreement with the NEA to increase its contracted incineration by 10%. The upgrade is planned to take place between the third quarter of 2015 to the third quarter of 2016. Beyond that, there has not been much to look forward to.

Foolish Take away

As lifelong students of Foolish long term investing, it pays to look under the hood to understand the “business behind the trust”.

Foolish investors might want to keep a watchful eye on the free cash flow and the cash position for the business trust for it to maintain its current distribution rate. The service concession for Senoko will also be up in around 10 years, therefore individual investors may want to take note of this in their estimation of future free cash flows.

As of the closing price on 20 October 2014 of $1.04, Keppel Infrastructure Trust traded at a price-to-book ratio of around 1.18, and has a distribution yield of around 7.5%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.