CitySpring – OCBC

Finally calls for cash

Rights issue to raise S$235.2m gross. CitySpring Infrastructure Trust (CitySpring) has announced a fully-underwritten renounceable one-for-one rights issue to raise gross proceeds of approximately S$235.2m. The rights issue price is S$0.48 per rights unit, or a 38.5% discount to yesterday’s close of S$0.78. The theoretical ex-rights price (TERP) is S$0.63 per unit. Sponsor Temasek Holdings will take up its full pro-rata entitlement of 27.77% of the rights units, and will sub-underwrite another 4.24% of rights units.

Repaying debt at the trust level. The estimated net proceeds of S$227.5m will be used to repay part of the S$370m DBS term loan at the trust level. The manager disclosed that it intends to replace that facility with a revolving credit facility (RCF) for the same S$370m amount (with only approximately S$142.5m drawn). CitySpring has received in-principle approval from DBS for the RCF but terms and costs are still being negotiated. The manager estimates net interest savings of S$4.7m per year, which takes base management fees and RCF running costs into account (but not any upfront fee). Using this estimate, it calculates pro forma 1Q10 DPU to be 1 S cent on the enlarged units base versus 1.75 S cents current.

Call gives new flexibility. The manager said the rights issue and the committed RCF gives CitySpring flexibility both in terms of funding power and timing. This flexibility could potentially be deployed towards funding acquisitions or enhancement opportunities at existing assets. The latter opportunities could include investments in the new telecoms business at Basslink or partially funding the gas network conversion program at City Gas (which could start as soon as 2HCY10).

Valuation. The cash call was no surprise, and we view it positively as it clears part of the overhang of the 100% debt-financed Basslink acquisition. The trust can now shift out of ‘neutral gear’ and seriously consider growing its asset base over the next 12 to 18 months. No post-rights DPU guidance is given. We believe it will be determined by the exact RCF terms and the timing/extent of any enhancement plans. If payout is unchanged, we believe an annual post-rights DPU of 3.9 to 4 S cents is a fair benchmark (a yield of 6.2-6.3% on the TERP). While this per-unit number is lower, the rights issue has created scope for DPU growth that was previously absent (in our opinion). Maintain BUY with S$0.84 fair value estimate, with earnings estimates unchanged for now. Ex-rights fair value would be S$0.68.