KGT – AmFraser

Revenue dragged down by absence of construction revenue. KGT’s FY13 revenue was 12% lower YoY, which was largely the result of the exclusion of construction revenue arising from the flue gas treatment upgrade. Revenue from operation and maintenance (O&M) was S$50mil for FY13, which was S$0.3mil lower than FY12, due to lower output from the waste-to-energy plants and NEWater plant. This was partially offset by annual adjustment of O&M and power tariffs.

7.4% yield masks a partial return of capital. KGT’s DPU of 7.82c per unit translates into a yield of 7.4%. We continue to urge investors to look beyond the advertised yield as it masks a partial return of capital from the gradual decline in service concession receivables. KGT’s service concession receivables represent the right to receive fixed and determinable payments from the NEA and PUB.

NAV declining. To put things into perspective, KGT’s NAV continues to be on the decline and currently stands at S$1 per unit. As at Dec 12, KGT’s NAV stands at S$1.05.

Current level of distributions not sustainable. KGT’s concession agreements on its Senoko Plant, Ulu Pandan Plant and Tuas DBOO Plant end in 2024, 2027 and 2034 respectively. As these concession agreements expire, KGT will witness a step-down in its overall distributions. We project KGT’s DPU to decline to 2.25c in FY25 following its first concession expiry.

Maintain SELL. With a true free cash flow yield of merely 2.4%, KGT certainly does not warrant as a compelling yield investment, in our view. The trust’s declining NAV, short remaining concession lives of its assets as well as its low true free cash flow yield are our key concerns. We maintain our SELL recommendation on KGT with a target price of S$0.72.