Business Trusts

Kim Eng on 21 June 2012

Trust rekindled. Reliance Communications, India’s second-largest telecom operator by subscriber numbers, received approval from the Singapore Exchange (SGX) last week to list its undersea cable network as a business trust (BT). This followed Fortis Healthcare’s announcement last month to spin off its non-core businesses into a business trust as well. The duo are among the business trusts that have announced plans to list on the SGX in recent times, rekindling interest in such a listing structure.

Beware of mispricing. A closer examination of three Singapore-listed BTs unveils a common theme – projected yields based on the IPO price appear to have fallen short. Take, for example, Hutchison Port Holdings Trust (HPHT), whose projected yield was 5.8-6.5% at its IPO price of USD1.01. However, price levels have since fallen closer to USD0.70, and as a result, yields have surged to 9-10% pa. For us, gearing remains a salient concern because business trusts are not bound by explicit restrictions as opposed to REITs.

Locking in success post-IPO. Hong Kong’s PCCW chairman Richard Li successfully listed his telecommunication assets in the territory’s first-ever BT in Nov 2011 and performance post-IPO has so far been encouraging. By contrast, Singapore BTs have generally disappointed post-IPO. Our case study highlights two factors that could tip the scales in favour of success, namely, sponsor shareholding and projected yields at the time of IPO.

A study of three Singapore-listed business trusts
The BT trio. We take a closer look at Hutchison Port Holdings Trust, CitySpring Infrastructure Trust and K-Green Trust, which all hold mainly infrastructure assets in their portfolio.

A clear case of mispricing. All three BTs appeared to have yields pegged at approximately 6-7% at the time of their IPO. However, following recent unit price declines, they have forecasted yields of between 8% and 9%. This begs the question: Should one invest in BTs post-IPO when yields turn attractive at more than 8% pa? As things stand, perhaps so.

Yields attractive but risks lurk. While distribution yields of more than 8% can be rather attractive especially in a volatile economic environment, it would be prudent to bear in mind some of the key risks of investing in a BT.

Loan refinancing: BTs have no explicit caps to their gearing (see Appendix) and hence, would carry varied levels of debt on their balance sheet. More importantly, many BTs pay out close to 100% of their distributable income, and if they should fail to find affordable refinancing options when loans come due, distribution cuts or cash calls may well result.

Asset write-downs: A BT¡¦s underlying assets could also be subject to write-downs based on market conditions and this would correspondingly affect unit prices. A case in point is the depressed unit price of shipping trusts which significantly eroded investors¡¦ earlier yield gains.

Dismal price performance versus STI. The three BTs in our study underperformed when benchmarked against the Straits Times Index (STI).

Also underperformed against FSTREI. When benchmarked against the Singapore REIT Index (FSTREI), the three BTs again came up short.

Hong Kong case study: PCCW¡¦s HKT Trust
Struggled at IPO, but well-received subsequently. HKT Trust had its IPO price set at HKD4.53, the bottom end of a marketed range, when it listed in Nov 2011. Despite a short trading history, it has gone on to outperform the benchmark Hang Seng Index post-IPO, unlike the case for Singapore BTs (Figure 10).
What it had. We can think of two reasons why HKT Trust succeeded where Singapore BTs failed. They are: attractive forecasted yield at IPO and a strong sponsor shareholding.

9% yield presented at IPO. Because HKT Trust was priced at the bottom end of its indicative IPO range, the implied forward distribution yields of around 8.9% looked rather attractive. This is in contrast to our earlier sample of Singapore-listed BTs which were priced to yield approximately 6.5-7% pa.

Sponsor maintains a 63% stake. The fact that HKT Trust¡¦s sponsor, CAS Holdings, holds a majority stake in the trust might have encouraged investors, who are generally concerned about sponsors divesting overpriced assets to BTs or REITs. A quick scan of sponsor holdings for our sample Singapore BTs show that they fall below 50%, with HPH Trust having the lowest sponsor shareholding of 28%.