K-Green Trust

AmFraser Research, April 16

WE initiate coverage on K-Green Trust (KGT) with a "sell" call and a fair value of S$0.80.

KGT is a business trust listed on Singapore Exchange, with a focus on "green" infrastructure assets. Its portfolio contains three assets: Senoko Waste-to-Energy (WTE) Plant, Keppel Seghers Tuas WTE Plant and Keppel Seghers Ulu Pandan NEWater Plant. We estimate that Senoko WTE plant accounts for about 70 per cent of KGT's overall cash flow. KGT's assets are held on long-term concession agreements with statutory bodies such as the National Environment Agency (NEA) and national water agency PUB, which have a remaining concession term of 11-21 years.

On the surface, KGT's 7 per cent yield may seem enticing, compared with the average 5.8 per cent yield across S-Reits and business trusts at present. However, we note that KGT's 7 per cent yield comprises both a partial return of capital and free cash flow yield. We estimate that KGT's partial return of capital makes up approximately 68 per cent of its overall distributions, implying that its true free cash flow yield is merely a low 2.2 per cent.

We believe a 7 per cent yield is insufficient to compensate for the cost of its lease runoff and declining NAV. The concession agreement for the Senoko Plant expires in 11 years; we expect its overall distributions to be more than halved post 2024. After the expiry of Senoko's concession agreement, the concession for the Ulu Pandan Plant would cease in 2027, resulting in another step-down in distributions.

The acquisition cost of KGT's assets is recognised as service concession receivables, which will decline gradually as KGT receives its fixed capital cost payments from the NEA and PUB over time.

KGT says its WTE plants - Tuas DBOO (design, build, own and operate) and Senoko - are operating at near-full capacity and therefore have limited room to take advantage of higher energy demand. While there is scope for capacity expansions at Ulu Pandan, there are currently no plans to commit capex to increase capacity at the plant.

Although KGT's zero gearing level is a plus, its inability to act on any acquisitions since its IPO listing probably brings into question its ability and willingness to leverage on its clean balance sheet and build on its existing cash flow stream. Given the management's conservative approach towards acquisitions, we are currently not factoring in any acquisitions in our model.

SELL