KGT – DBSV

Green is the colour of Cash

• "Green" assets with steady long term cash flow

• Zero debt balance sheet will enable growth

• However, growth pipeline is limited at this point

• Projected DPU yield of 6.9% not far from peers; initiate coverage with HOLD and TP of S$1.20

Stable, long-term cash flows. The initial portfolio of KGreen Trust ("KGT") consists of two Waste-to-Energy (incineration) plants as well as a water recycling (NEWater) plant in Singapore, with concession terms ranging from 15-25 years. The net cash flow generated will mostly comprise availability payments i.e. the fixed part of total payments, which will be paid as long as the contracted treatment capacity is made available, irrespective of actual volume treated. Counterparty risk is also minimal as off-takers are Singapore Government entities. Management has projected a DPU of 3.91Scts for the 6 months of FY10 and 7.82Scts for FY11, implying an yield of close to 7% at listing price.

Zero debt balance sheet could support inorganic growth. While the potential for organic growth is limited, the Trust does have the balance sheet flexibility to pursue inorganic growth, as it is debt-free at the time of listing. The Sponsor has provided a pipeline of 4 assets as part of Rights of First Refusal ("ROFR") deed, but these assets will need to be warehoused by the Sponsor until they are operationally stable, and the smaller size of the ROFR portfolio means that even injection of the whole portfolio would only potentially enhance FY11 DPU by less than 5%.

HOLD, for now. Given its debt-free balance sheet and steadier non-cyclical cash flows than some peers, we expect KGT could trade at a slight premium to other infrastructure business trusts. Given the historical trading ranges of peers, we believe KGT could trade between 6-8% target yield, which would imply a share price range of S$0.98 – S$1.30. Our valuation, based on a slight premium to peers (6.5% target yield) is S$1.20. Initiate with HOLD, catalysts could come from a larger and more visible acquisition pipeline.