CitySpring – OCBC

Nascent infrastructure play

Singapore-listed infrastructure play. CitySpring Infrastructure Trust (CitySpring) is a Singapore-listed business trust focused on infrastructure assets. It owns City Gas, Singapore’s only producer and retailer of piped town gas. It also owns a 70% stake in SingSpring, Singapore’s only supplier of desalinated water to the Public Utilities Board. After its IPO, CitySpring went on to acquire Basslink, an electricity interconnector in Australia. These assets essentially operate as regulated monopolies with regulated tariffs (City Gas) or under long-term contracts and concessions (SingSpring and Basslink).

Backed by Temasek. CitySpring is sponsored by Temasek Holdings (Temasek), a private investment vehicle wholly owned by the Singapore government. Temasek owns CitySpring’s trustee-manager and is also the trust’s single largest unitholder with a 27.8% stake. Investing and owning infrastructure assets is not an easy task, with risks on political, social, legal, and technical levels. Temasek has a strong balance sheet, is highly experienced in infrastructure investments, and has a strong business network internationally. This is a key differentiator in our opinion.

Stable, non-cyclical cash flows. CitySpring’s assets feature some unique characteristics including: (1) a monopolistic market position or strategic consideration; (2) stable and predictable cash flows that are fairly non-cyclical; (3) CPI-linked revenue escalations that act as a hedge against inflation or regulator-controlled returns; (4) fairly inelastic demand or availability-based revenues; and (5) a long investment horizon. We find the stability of CitySpring’s cash flows attractive, especially in current market conditions. The non-cyclical nature of CitySpring’s cash flows is also a major differentiator against other yield plays like shipping trusts and REITs who may be heading into industry downturns.

Deferred cash call blocking further growth. CitySpring originally intended to fund last year’s S$1.5bn Basslink acquisition on a 3x debt-to-equity basis. CitySpring then decided to wait out difficult market conditions, and has postponed the equity issue indefinitely. Basslink is currently 100% debt financed, which we do not find sustainable. In our view, CitySpring’s current portfolio lacks critical mass and we would like to see it significantly grow its portfolio through further acquisitions. This makes the equity cash call necessary, not just inevitable. This affects our valuation of the trust and we initiate coverage on CitySpring with a HOLD recommendation. Our fair value estimate is 80 S cents, or 15.5x FY09F EV/EBITDA (adjusted for SingSpring’s lease receivable repayment). CitySpring is paying out 7 S cents a year, which translates to a 10% yield.