CitySpring – DBSV

Lack of positive catalysts

At a Glance

• 4Q11 DPU maintained at 1.05Scts; no surprises

• Cash earnings down 9% q-o-q in 4Q11 as margins in CityGas were affected by higher fuel costs

• Negative risk sharing payments at Basslink continue to impact cash flows

• Guidance for FY12 stays flat at 4.20Scts; maintain HOLD with unchanged DDM-based TP of S$0.58

Comment on Results

Cash earnings down again. Cash earnings for 4Q11 came in at S$16.7m, down 9% q-o-q and almost 30% y-o-y, largely owing to higher fuel costs at CityGas and negative CRSM (risk sharing mechanism) payments at Basslink. Revenues were up slightly (3% q-o-q) to S$110m on the back of higher tariffs at CityGas, but it was not enough to counter the higher fuel prices during the quarter. Basslink again saw negative CRSM outflow in 4Q11 and FY11. Basslink recorded total negative CRSM payments of A$16.7m, impacting cash flows. Overall, total cash earnings of S$77m in FY11 were 30% higher than S$59m earned in FY10.

Payout maintained, guidance flat. The Group paid out 1.05Scts for 4Q11, in line with guidance, and a payout ratio of 54% for FY11. Total gross cash increased to S$159m at end-FY11, up from S$133m at end-FY10. This included restricted cash of about S$26m placed in escrow account earlier to meet S&P criteria and avoid a downgrade on Basslink’s credit rating.

Outlook and Recommendation

Refinancing secured. The Trustee-Manager also announced that DBS Bank has agreed to roll over the S$128m term loan at CityGas (Feb’12 to Feb’14) and S$142m corporate loan at CitySpring (from Aug’11 to Aug’14). The Trustee-Manager will complete its review of the Group’s capital structure by Sep 2011 to ensure sustainability of dividends. While balance sheet risks have subsided somewhat, given the lack of DPU growth or any other positive catalysts, we maintain our HOLD call at an unchanged TP of S$0.58.