CitySpring – Kim Eng

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Old issues remain

• Due to the timing mismatch in City Gas fuel’s cost pass-through (rising costs) and the lag in tariff adjustment upwards, bottomline has remained volatile. We expect bottomline losses to persist in FY13, as City Gas continues to seek tariff increases as needed in order to catch up with the rising fuel costs.

• Basslink’s income contribution continues to vary due to the Commercial Risk Sharing Mechanism (CRSM) with HEC in which if Basslink transmits more electricity to Victoria, it will share in the added revenue from the sales and vice versa.

• CitySpring is targeting FY13 DPU of 3.28 S-cts (8.7% yield). While CitySpring’s bottomline remains in the red, cash earnings do catch up. With a cash balance of SSGD161m, distribution payments are expected to be sustained, at least in the near-term. Key downside risk, in our view, is a deteriorating credit environment which elevates borrowing/refinancing costs.

 

Background: Listed in 2007, CitySpring Infrastructure Trust is Singapore’s first infrastructure trust that invests in Infrastructure assets. The Trust, through its subsidiaries, produces and retails town gas (City Gas) as well as supplies desalinated water to PUB (SingSpring), transmit electricity (Basslink), and in its capacity as trustee-manager (CityNet) of Netlink Trust, manages telecoms assets. In FY12, City Gas made up 73.7% of total revenue, followed by Basslink with 18% and the balance from SingSpring and CityNet. Key costs consist primarily of fuel, transportation, depreciation and finance expense, making up 87.5% of FY12 revenue.

Why are we highlighting this stock? The utilities businesses are largely driven by economic activity and population growth. With population growth projected to slow down to 1.7% and 1.5% p.a. in 2011-2015 for Singapore and Australia respectively (CitySpring’s markets), fresh investments through new service opportunities (potentially telecoms space) are probably warranted. The appointment of a new CIO in Nov 2011 attests to CitySpring’s growth commitment. We visited the management recently post-FY12 results to get an update on the trust’s existing operations and expansion plans.

Our view

Delayed tariff adjustments skew bottomline. Due to the timing mismatch in City Gas fuel’s cost pass-through (rising costs) and the lag in tariff adjustment upwards, bottomline has remained volatile. City Gas has obtained three rounds of tariff adjustments in FY12. Nonetheless, we expect bottomline losses to persist in FY13, as City Gas continues to seek tariff increases as needed in order to catch up with the rising fuel costs.

Basslink remains a drag. Basslink’s income contribution continues to vary due to the Commercial Risk Sharing Mechanism (CRSM) with HEC in which if Basslink transmits more electricity to Victoria, it will share in the added revenue from the sales and vice versa. So far, we have seen cooler summer temperatures and more autumn rain and we expect CRSM payments to stay negative. The next CRSM review is scheduled in 2016, but management has started approaching HEC to renegotiate the terms.

Adequate buffer to support distribution. CitySpring is targeting FY13 DPU of 3.28 S-cts (8.7% yield). While CitySpring’s bottomline remains in the red, cash earnings do catch up. With a cash balance of SSGD161m, distribution payments are expected to be sustained, at least in the near-term. Key downside risk, in our view, is a deteriorating credit environment which elevates borrowing/refinancing costs.