CitySpring – OCBC
Unique infrastructure assets bear a closer look
High dividend yields. CitySpring Infrastructure Trust (CitySpring) is a listed business trust. Business trusts are able to pay distributions out of operating cash flows consisting of both accounting profits and non-cash charges such as depreciation. Consequently, the trust is able to offer a high dividend yield of 8.8%, based on its most recent quarterly payout.
Strong asset portfolio. What differentiates CitySpring from other listed trusts is its unique portfolio of infrastructure assets. It came to the market in February 2007 with two local assets – City Gas and SingSpring. City Gas is Singapore’s only producer and retailer of piped town gas. SingSpring is Singapore’s only supplier of desalinated water to the Public Utilities Board. It is considered a key diversifier as part of the government’s “four taps approach” for Singapore’s water sources. After its IPO, CitySpring has gone on to acquire Basslink, an electricity interconnector in Australia.
Features unique to infrastructure assets. These assets essentially operate as regulated monopolies with regulated tariffs (City Gas) or longterm contracts and concessions (SingSpring and Basslink). SingSpring and Basslink enjoy a revenue model distinctive to infrastructure assets: as both are considered key strategic assets, they are compensated by availability – not by utilization. Such a revenue model is untouched by industry cycles unlike say, shipping trusts or REITs, making cash flows truly stable and predictable over the long haul.
A key risk is a changing regulatory landscape. For instance, it is expected that City Gas’ domain will be restructured and liberalized over seven to nine years. Nevertheless, CitySpring believes that steep economies of scale in the residential segment and a 600,000 strong customer base will make City Gas a formidable incumbent.
Basslink acquisition DPU accretive, but not yet. CitySpring’s S$1.5b Basslink acquisition was intended to be 75% debt and 25% equity funded with trust parent Temasek initially providing an S$370m equity bridge facility. We note that Basslink currently does not contribute to the trust’s distributions – its contribution was originally supposed to kick off after the planned equity issue took place. Given current market conditions, it seems most likely CitySpring will instead resort to more debt funding for now. If the equity issue is indeed shelved, it is unclear when Basslink will start being accretive to the trust’s DPU and by how much. CitySpring is currently trading at S$0.725, a 10% discount to its NAV and a 19% discount to its IPO price. We do not have a rating on this stock.