CitySpring – OCBC

Cash earnings recover in 3Q09

Cash earnings re-stabilize. CitySpring Infrastructure Trust (CitySpring) posted a 4.3% YoY gain in 3Q09 revenue to S$101.2m and a net loss of S$21.3m primarily due to non-cash items such as fair value losses. Most importantly, cash earnings recovered at S$20.3m versus S$1.1m a quarter ago. To recap, 2Q cash earnings were hit by one-off items; a timing lag between quarterly-adjusted tariffs and actual fuel costs at City Gas; a negative CRSM1 payment and lower facility fees at Basslink. The underrecovery at City Gas was reversed during 3Q09 as fuel costs fell. City Gas has since reduced its gas tariffs from 1 February 2009. Over time, the revenue model is designed to leave City Gas neutral to the effect of changes in fuel costs. Basslink also recovered A$1m in facility fees based on its cumulative availability at year end. However, the trust registered another negative CRSM payment of A$3.1m. Meanwhile, CitySpring’s NAV dropped 80% to 10.6 S cents from 52.4 S cents a quarter ago. This figure is an unreliable gauge of the trust’s performance because of volatility created by (non-cash) movements in the fair value of financial instruments like interest rate hedges.

Fairly defensive assets. CitySpring’s assets have been relatively untouched by the current economic environment. This continues to be a key differentiator against other yield instruments like shipping trusts and S-REITs, which are witnessing industry downturns that create either revenue or counterparty uncertainty. The trust’s assets are fairly defensive, enjoying either a monopolistic market position or strategic consideration. City Gas earns regulated tariffs from over 600,000 domestic, commercial and industrial customers. It is likely that some of its commercial customers such as restaurants and hotels may be affected by the current downturn but the business primarily earns revenue from household use. Over the quarter, City Gas recorded a 7.7% YoY increase in sales volume. Meanwhile, SingSpring and Basslink earn availability-based revenues from strong counterparties (Singapore’s Public Utilities Board and Australia’s Hydro Tasmania).

1.75 S cents DPU. The trust will pay out 1.75 S cents per share for the quarter, flat QoQ and up 9.4% YoY. This translates to an annualized trailing yield of about 13.5%. The trust said it expected to meet its projected payout of another 1.75 S cents in 4Q09. Our concerns remain intact: in our opinion the 100% debt financing of the trust’s Basslink acquisition is not a long term solution and an equity injection is inevitable at some point. Maintain HOLD with S$0.57 fair value.