CitySpring – OCBC

2Q09 cash earnings hit by timing lags and one-offs

Cash earnings hit in 2Q09. CitySpring Infrastructure Trust (CitySpring) posted a 31.7% YoY gain in 2Q09 revenue to almost S$101m, and a net loss of S$36.7m, largely due to non-cash items such as fair value losses and depreciation charges. To track CitySpring’s performance, we typically look to cash earnings, which came in at S$1.1m, or 90.2% lower than the trust had projected in its January unitholders circular. In contrast, the trust had earned S$14.1m in 2Q08 and S$17.7m in 1Q09.

Timing lags and one-offs. The biggest hit to cash earnings came from the payment of a one-time upfront fee of S$7.8m for the recently secured S$370m loan. We estimate another S$4m hit is due to a timing lag between tariffs (which are adjusted quarterly) and actual fuel costs at City Gas. City Gas expects to recoup the under-recovered fuel costs in 3Q09. Lower facility fees, which will be partially recouped, and S$2.5m in negative CRSM payments at Basslink also impacted cash earnings. The trust will maintain its 1.75 S cents quarterly payout by utilizing retained cash. CitySpring estimates its accumulated cash surplus as at 30 Sept is about 3.7x the current quarterly distribution – a nice cushion against any further one-offs or lags.

Same investment case. The investment case for CitySpring is unchanged – its strong sponsor (Temasek) and its basket of defensive assets. The trust’s assets feature (1) a monopolistic market position or strategic consideration; (2) fairly 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. The noncyclical nature of CitySpring’s cash flows is also a major differentiator against other yield plays like shipping trusts and REITs who have run into industry downturns.

Same concerns. Our concerns have been accentuated, rather than assuaged, by the 28% decline in CitySpring’s share price since our last report. Basslink, CitySpring’s S$1.5bn acquisition, is currently 100% debt financed. This approach allowed the trust to bypass shaky equity markets but it is not a sustainable or permanent solution in our view. Additionally, we feel CitySpring’s current portfolio lacks critical mass and should grow through further acquisitions. An equity cash call would be a necessary next step – but it would be highly dilutive at current price levels. We retain our HOLD rating with new fair value of S$0.57 (previously S$0.80). We have also adjusted our earnings estimates to reflect a weaker AUD.