KGT – AmFraser

Uninspiring prospects

We initiate coverage on K‐Green Trust (KGT) with a SELL call and a fair value of S$0.80.

KGT is a business trust listed on the Singapore Exchange, with a focus on ‘green’ infrastructure assets. KGT’s portfolio contains three assets, namely Senoko Waste‐to‐Energy (WTE) Plant, Keppel Seghers Tuas WTE Plant and Keppel Seghers Ulu Pandan NEWater Plant. Out of the three assets, we estimate that Senoko WTE plant accounts for approx. 70% of KGT’s overall cash flows. KGT’s assets are held on long‐term concession agreements with statutory bodies such as NEA and PUB, which have a remaining concession term of between 11 and 21 years.

Look before you leap. On the surface, KGT’s 7% yield may seem enticing compared to the average 5.8% yield across S‐REITs and business trusts at present. However, we note that KGT’s 7% yield comprises both a partial return of capital and free cash flow yield. We estimate that KGT’s partial return of capital makes up approx. 68% of its overall distributions, implying that its true free cash flow yield is merely a low 2.2%.

Self‐liquidating. We believe a 7% yield is insufficient to compensate for the cost of its lease runoff and declining NAV. With the concession agreement for the Senoko Plant expiring in 11 years’ time, we expect its overall distributions to be more than halved post 2024. Subsequent to the expiry of Senoko’s concession agreement, the concession for the Ulu Pandan Plant would cease in 2027, resulting in another step‐down in distributions. Moreover, the acquisition cost of KGT’s assets is recognized as service concession receivables, which will decline gradually as KGT receives its fixed capital cost payments from the NEA and PUB over time.

Limited scope for organic growth. According to KGT, its WTE plants namely Tuas DBOO Plant and Senoko Plant are already operating at near full capacity and therefore have limited room to take advantage of higher energy demand. While there is scope for capacity expansions at the Ulu Pandan Plant, there are currently no plans to commit capex to increase capacity at the plant.

Any upside will have to come from acquisitions. Although KGT’s zero gearing level is a plus, its inability to act on any acquisitions since its IPO listing probably brings into question its ability and willingness to leverage on its clean balance sheet and build on its existing cash flow stream. Given the management’s conservative approach towards acquisitions, we are currently not factoring in any acquisitions in our model.