CitySpring – DBSV

Robust capital plan remains top priority

At a Glance

• 3Q11 DPU maintained at 1.05Scts; no surprises

• Receives temporary respite from S&P with respect to credit rating of Basslink bonds

• Catalysts only possible after management reviews capital structure; maintain HOLD with DDM-based TP of S$0.58

Comment on Results

Cash earnings down q-o-q. Revenues were up 12% y-o-y and 3% q-o-q to S$107m on the back of higher tariffs at CityGas and a stronger AUD. Cash earnings, while up 67% y-o-y owing due to better margins at CityGas, was down almost 20% q-o-q to about S$18m as Basslink cash earnings disappointed. Basslink again saw negative CRSM (risk sharing mechanism) payments to the tune of A$5.2m, which affected results. The Group paid out 1.05Scts for the quarter, in line with the guided 4.2Scts for FY11. About 56% of net cash generated was distributed in 3Q11, and gross cash buffer improved to S$123m.

Outlook and Recommendation

Bond rating concern diminishes in near term. To recap, S&P had put the senior secured debt issues at Basslink on CreditWatch negative. If the ratings on the outstanding bonds are downgraded, Basslink will be barred from repatriating distributions to CitySpring. Recently, the Trustee-Manager put A$20m in an escrow account to meet S&P criteria and subsequently, Basslink has been removed from the CreditWatch list and its BBB- rating affirmed (with a negative outlook). Thus near term concerns have been alleviated but the Trustee-Manager will still have to review the capital structure of the Group by September 2011 to ensure stable dividends from Basslink. In view of this uncertainty and the continued dispute with Hydro Tasmania regarding the interpretation of CRSM dues to the tune of A$6.9m – which could culminate in litigation – we maintain our HOLD call on the stock at an unchanged TP of S$0.58. The Trust will also have to refinance S$142m of corporate loan due in August 2011. Acquisition catalysts are unlikely in the near term given the management focus on putting in place a “robust” capital plan at the earliest.