CitySpring – MS

Flat DPU Guidance Despite Strong Cash Earnings;Lacking Near-term Catalysts

Quick Comment: CitySpring’s FY4Q09 cash earnings of S$21.8 million were higher than our expectations and comparable to the previous quarter’s, despite a downward revision to City Gas’s tariff in February 2009 to adjust for lower fuel costs. Management’s FY10 dividend guidance of S$0.07 implies a 13% yield, which is attractive compared to that of REITs, in our view. The stock has risen 5% since the beginning of May but has underperformed the STI, as concerns remain on the trust’s inability to grow inorganically, due to the current credit crunch.

What’s new: CitySpring reported 4Q09 (January-March 2009) revenue of S$97.3 million (-3.8% QoQ, +1.5% YoY), due mostly to higher revenue from SingSpring. Despite a tariff reduction in February 2009, cash earnings were higher than our expectations at S$21.7 million (+7.6% QoQ, +7.3% YoY). Net losses declined significantly to S$0.4 million (3Q09: -S$21.3 million), due to a S$8.9 million fair value gain on derivative financial instruments.

What we liked: 1) Cash earnings protected by interest rate floor; 2) CRSM was positive for first three months of the year, cumulative availability above 97%; and 3) Basslink Telecoms will be operational by the middle of the year and provide organic growth.

What we did not like: 1) No increase in dividend payout for FY10; 2) CRSM for full year was negative, due to low volatility; 3) write-down of intangibles on the Telecoms Agreement amounting to S$11 million; and 4) reduced gross margin for City Gas as a result of the tariff reduction.