Keppel Infrastructure Trust (A7RU) Earnings Call Transcript & Summary

On behalf of the Trustee Manager, thank you for joining Keppel Infrastructure Trust's First Half 2024 Results Webcast. My name is Elaine from the Investor Relations team. Hosting the session this evening are: CEO, Mr. Kevin Neo; CFO, Mr. Raymond Bay; Head of Portfolio Management and Optimization, Mr. Marc Liu. We will begin the session with an update on KIT's operational and financial performance for first half 2024, before we open the session for questions. For analysts who are joining us on the WebEx platform, please be reminded to only unmute your mic during the Q&A session. I will now hand the time over to Kevin for the presentation. Kevin, please.

All right. Thanks, Elaine. Good evening, and thank you for joining us today. I will start with Slide 4. KIT delivered a steady set of results with higher underlying 1H 2024 distributable income. 1H 2024 distributable income of SGD 91 million was largely due to timing differences, as well as one-offs. Factoring in these one-offs and timing differences, 1H 2024 distributable income after adjustments was about SGD 117.8 million, 2.1% higher year-on-year. Accordingly, we declared a DPU of 1.95 cents, an increase of 1% year-on-year. Aside from the resumption of contribution from KMC and new acquisitions in 1H 2024, which contributed approximately 18% of asset distributable income, the KIT portfolio continues to deliver steady operational performance across its businesses and assets. Moving to the next slide. We continue to grow through acquisitions and value creation. We extended KMC's capacity tolling agreement by 10 years, restructuring the KMC loan to allow the plants to resume contributions to KIT. In January 2024, we made our first solar investment, which grew our AUM to SGD 8.1 billion as at 2 Jan 2024. With the completion of the acquisition of Ventura on 3 June 2024, as well as the second and third closing of the German Solar Portfolio, KIT AUM increased by approximately 8% to SGD 8.8 billion as at end June. Moving to Slide 6, focusing on the growth along the theme of sustainable infrastructure, KIT completed the acquisition of Ventura, the largest bus service business in Victoria, Australia, in June. To recap, given Ventura's significant market share of public commuter routes in Melbourne, it is a provider of essential infrastructure and public services. Its income are highly defensive with more than 80% of its revenue backed by long-term inflation indexed government contracts with 0 farebox or patronage risk. Revenues are negotiated with government at contract inception and are paid on a fixed basis based on an estimate of service delivery cost plus a fixed margin. Contracts are periodically indexed at relevant benchmarks such as CPI, fuel index and labor index. Additionally, Ventura is reimbursed for capital expenditures on fleet acquisitions and depot upgrades over time. As a platform on scale, Ventura is a highly accretive business with growth upside, which will generate stable recurring cash flows for KIT. With this, I will hand the time to Raymond, who will go through our business updates and financial performance in greater detail.

Okay. Thanks, Kevin. Turning to Slide 8. City Energy achieved 100% plant availability in first half 2024 and continues to maintain a sizable base of over 900,000 customers at -- as at end June. This is supported by the continued recovery of the commercial and industrial segment. In the EV business, City Energy Go continued to leverage in its long-established relationship with real estate developers to secure new charging sites. Since the launch of EV charging services business in April 2022, City Energy Go has extended EV charging services to about 23,000 carpark lots in private residential and mixed developments. For the renewables portfolio, we continue to expand our renewable portfolio with addition of the German Solar Portfolio in phases. We completed the first 3 closing to date representing deployment of approximately 55,000 bundled solar system. In Germany, BKR2 has been granted additional grid capacity that will see its output capacity increasing to 486 megawatts, following equipment upgrades. Moving to transition assets. In the Middle East, demand at AGPC continues to be underpinned by the Kingdom's economic growth and favorable demographics. I shall not go into details of the KMC CTA extension, as this has been covered earlier. Turning to Slide 9. EMK maintained full utilization rate for its incineration business. EMK continue to seek opportunity for growth and has ventured into plastic recycling and asbestos treatment to expand its waste management solutions. The landfill business remains stable, despite pricing headwinds in the second quarter. Volumes are expected to improve from the third quarter, while price recovery may take a while longer to filter through. To support future volume expansion, an adjacent site to the landfill was acquired. Looking ahead, we will continue to drive organic and inorganic growth at EMK. Back in Singapore, operation at our waste and water plants remain stable, fulfilling their contractual obligations in the quarter. Moving to the Distribution and Storage segment on Slide 9 (sic) [ Slide 10 ]. In first half 2024, Ixom continued to see solid performance in its core product of coagulants and chlorine across the Australian and New Zealand water segments. Demands in New Zealand business was consistent with favorable conditions supporting a strong dairy season. Philippine Coastal continued to benefit from its high tank utilization rate of 97.5% as at end June 2024. Leveraging on our deep relationships with our customers in first half 2024, a contract renewable -- sorry, a contract renewal with a major customer was secured at an attractive pricing for 4 years. The construction of new tanks as part of Philippine Coastal's capacity expansion plans is expected to complete in the second half of the year. Continuing with the Distribution and Storage segment on Slide 11. Ventura continued to deliver market-leading performance in metrics such as punctuality and reliability, outperforming past industry targets in Victoria. Ventura is a strong platform to accelerate growth within its existing business, as well as adjacent verticals. Some strategic growth plans include network expansion within and beyond Victoria. Additional electrification revenue from capitalizing on opportunities to monetize unused charging capacity at electrified depots, as well as expansion of its private chartering business. Moving to Slide 12. To reflect asset values which are largely recognized at cost in statutory report, KIT conducts an annual independent portfolio valuation. Based on the portfolio valuation done by independent valuer, Ernst & Young, AUM was at SGD 7.4 billion as at 31 December 2023. Following the acquisition of Ventura and the first 3 phases of completion of the German Solar Portfolio, KIT AUM stood at SGD 8.8 billion as at 30 June 2024. KIT remains anchored by resilient and diversified portfolio that is largely insulated from inflation, having over 90% of the Trust business and assets with cost pass through or CPI-linked mechanism, all in market-leading position that allow for some pricing power. Turning to Slide 14. Moving on to the financial capital management. We declare higher distribution per unit of 1.95 cents for first half 2024. With the books closure date on 5 August, payment of the distribution will be on 13 August 2024. The next slide provides a breakdown of our first half distributable income. The lower DI due largely to timing differences, as well as one-offs. Factoring in this, first half 2024 DI would see an increase of 2.1% year-on-year to SGD 117.8 million, contributed by the addition of Ventura and the first 3 phases of German Solar Portfolio, as well as the resumption of DI contribution from KMC. In the Energy Transition segment, at City Energy, under recovery due to timing fuel cost pass through was SGD 9.7 million with higher maintenance CapEx of SGD 2.1 million. At the Transition Assets, there was a one-off gain from unwinding of interest rate swaps at AGPC of SGD 7.4 million in first half 2023. In the Environmental Services segment, EMK distribution was lower due to retrofitting works for plastic recycling plant, as well as softer prices for the landfill business in the second quarter, as shared earlier in the business update. In the Distribution and Storage segment, Ixom operating performance was impacted by higher incremental finance costs of SGD 7.8 million, maintenance and growth CapEx of SGD 10.5 million. This is offset by lower tax paid for first half 2024 of SGD 11.1 million. Philippine Coastal's DI contribution would be higher after adjusting for growth CapEx and the upfront financing cost of -- amounting to SGD 4.2 million. Slide 16 provides a snapshot of our balance sheet position. We maintain a strong balance sheet that is well capitalized to support our growth aspirations. The Trust net gearing level increased from 41.1% as at the 31 March 2024 to 44.7% as at 30 June 2024. This is due to drawdown of the term loan to partially fund the acquisition of Ventura. As a business trust, KIT has the flexibility to go beyond the 45% gearing level if required, but the Trustee Manager will take a more prudent approach over the long term. Our approach to acquisition has been consistent. The Trustee Manager will typically fund the new assets with a term loan. If the market is conducive, we will take the opportunity to raise capital and rebalance our balance sheet. We maintain the flexibility to raise capital should there be an opportune time -- market window. Meanwhile, KIT's financial position remains strong, maintaining sufficient debt headroom over its financial covenant threshold with no imminent requirement to pay down debt. The Trustee Manager continued to monitor risk exposure and safeguard against evolving market conditions to mitigate against fluctuating interest rates. Approximately, 65.3% of KIT total loans are fixed and hedged as at 30 June 2024. The Trustee Manager has also hedged approximately 67.9% of the Trust's foreign income to mitigate impact of currency fluctuations. Moving to Slide 17. With the completion of KMC capital restructuring with 15 years of sustainability-linked loan, all material loans for FY 2024 has been refinanced. The acquisition of Ventura was partially funded with a SGD 392 million term loan due in 2025. The Trustee Manager has obtained revolving credit facilities totaling SGD 100 million in first half 2024, increasing our financial flexibility. With this, I will hand the time back to Kevin, who will share more on our sustainability updates.

All right. Thanks, Raymond. I will continue with Slide 19 on our investment in the German Solar Portfolio. I will not go into details as this has been shared earlier this year. The German Solar Portfolio is an attractive derisked portfolio that provides highly predictable and increasing cash flows to KIT, increasing KIT's total renewable capacity to 1.3 gigawatts upon completion. We have completed the first 3 closings of the acquisition in first half of 2024, with a fourth phase expected to complete in 3Q 2024. Moving to the next slide. We believe sustainability management is imperative to the continued success of KIT and its ability to create value, and we'd like to share some sustainability performance highlights in first half of 2024. With the acquisition of our German Solar Portfolio, we have expanded our exposure to renewable energy to about 1.3 gigawatts. This puts KIT exposure to green energy as over 18% of AUM as at 30 June 2024. We are also pleased to note that KIT's MSCI ESG rating was upgraded to A from BBB as a testament of our commitment to sustainability. In terms of conducting our businesses responsibly, we will continue to enhance our sustainability disclosures to align with best practices. In contributing to the development of our people and communities, in first half 2024 alone, more than 600 hours has been devoted to supporting community outreach efforts together with Keppel's Fund Management and Investment platforms. We place sustainability at the core of our strategy to create value and achieve growth, and maintain a responsible approach to managing our portfolio to deliver long term value to our stakeholders. Thank you.

[Operator Instructions] May I have the first question, please?

I'm Rahul from HSBC. Could I check? Am I audible?

Yes, Rahul.

Perfect. I had few questions. Maybe I'll go one by one. First, could you share more on the DI contribution from the German Solar Portfolio? Strangely, Q2 appears to be a negative DI. I assume there is some debt amortization scheduled here. And can we take 1H as a base for annualized contribution?

For the first half 2024, the German Solar Portfolio DI is SGD 7.2 million. This is a contribution from the first, second and third close of the acquisitions.

Right. But could you speak about what happened from 1Q to 2Q? 1Q was close to SGD 12 million. And that implies that second quarter was negative SGD 5 million. I'm trying to understand that, like with other assets, are there some debt amortization schedules and all that we should be aware of?

Yes, there is a debt amortization schedule.

And that will be half yearly, I assume?

Yes, it is half yearly.

Okay, great. Second, could you provide more color on Ixom? I mean, if I look back a bit in the history, right, it used to be close to SGD 90 million plus DI contributor. 2023, we had a fall, and it appears 2024 is also more like 2023 rather than going back to historical levels, even if we take out the maintenance and growth CapEx. I observed that in 1Q you actually wrote about a higher OpEx as well at Ixom, but nothing related to OpEx in 1H. So I'm just trying to understand, are you having -- is there some operational pressure as well in addition to the higher finance cost?

So, there is no operating pressure. What happened is actually the -- it is mainly due to finance costs and the growth -- maintenance and growth CapEx.

Okay. And when we think about the growth CapEx, I mean, when is it going to end?

Maybe -- I think -- this is Marc, I'm just trying to address your concern on this. So, I think, basically the growth CapEx is, as we see, we have a new business plan for Ixom. So, I think, you need to have [ input ] some growth plans in order to continue to grow the business. I think we do not expect significant growth CapEx to be [ input ]. I think the number itself is quite within the capability of Ixom's own operational cash flow.

So, Rahul, maybe I could add that, if your question is whether -- are we expecting a very heavy CapEx program for Ixom going forward? I think the answer to that is no. We do, at the right time, at the Ixom level, in fact, for all our other businesses where we engage in certain growth CapEx to increase EBITDA and to increase DI and so on, right? So, I would say, this CapEx that you see over here for the first half of 2024 may not be repeated in the second half this year. Of course, we are also chasing some organic growth opportunities at Ixom, right? But as and when they materialize, we may incur some growth CapEx.

Right. I understand. Next one is about, I think, which Raymond briefly mentioned about, right? The proportion of fixed and hedged debt is now actually down significantly if I compare it to, say, end of 2023. Is it because of the equity bridge loan?

Yes.

And are you comfortable keeping this at current levels or you want to go back to the history where it used to be much higher?

Yes, you're right. This is mainly due to the bridge loan drawn to acquire Ventura. So as soon as the bridge loan is repaid, the fixed and hedged debt ratio will go back to the normal level.

Okay, right, I understand. Just lastly, can you talk about the expected CapEx at Ventura that you foresee over the next few years related to the investment in EV sides? And will it impact the DI from Ventura?

Sure. I'll probably have a go at it first. The -- I think, yes, there is some growth CapEx expected at Ventura. This is mainly to fund the conversion of depots into -- diesel depots into what we call fully electrified depots. And I think we are expected to incur about CapEx to buy about 30-plus 0 emission buses every year. However, this will not affect our distributable income. This is because when we acquired Ventura, we actually sized or procured a very large CapEx facility that can be used to 100% debt fund all the CapEx. So there will be no impact to the cash [ yield ] from Ventura.

Can we have the next question, please? [ Ida ]?

I have 2 questions that are mostly related to capital management. Firstly, could you please provide a bit of guidance on where you see KIT's average cost of debt trending for the remainder of this year, as well as for next year? And secondly, given that KIT's gearing is now quite near the internal limit of 45% and in view of potentially easing market conditions, will we be looking to carry out the equity fundraising exercise in the second half of this year? Or is there a possibility that you could postpone this to maybe next year instead?

Ida, I'll take this question. Let me address the gearing question first. While our current net gearing is at 44.7%, there are no gearing limits on business trust and the Trust financial position remains strong, maintaining sufficient debt headroom over our financial covenants threshold. There is no imminent requirement to pay down our debt, but we will continue to closely monitor the market to ensure that we will capture an opportune time to raise capital from the market. So moving to the -- your second question, I think you asked about our interest rate, right?

Yes, that's right.

Yes. So the interest rate environment right now, we do expect the interest rate will come down over time as soon as FOMC initiates a cut. So, we do expect the weighted average interest cost to come down over time, but it's not going to be immediate impact, because we do have our loans hedged. So, it's gradual decrease.

On that point actually, I wanted to check with you for -- on the tenure of the hedges, because I was wondering if interest rates are going to come down, will you look to hedge less of your debt, so that you can capture more of the upside in terms of lower financing costs.

Yes, you're right. So, we do have a mixture of loans that is hedged to maturity, and some are hedged on a short-term basis. For example, we do have hedges as short as 1 to 2 years and hedges as long as 15 years. 15 years is for the KMC loan. For example, those are project finance. It has to be hedged to 15 years to ensure stable cash flow flowing back to the Trust.

And, for instance, right, another asset that we have long-term hedges is the German Solar Portfolio. That's a 15-year loan or 15- to 20-year loan at German Solar Portfolio with interest rate lock in for the full tenure. So, we do not take any financing risk on the German Solar Portfolio.

Okay. So, for the German Solar Portfolio, in terms of the rate that you are locking in at, is it relatively high, given the current market conditions we are facing now?

No. So these are the German -- you're talking about the German wind farm, right?

The Solar Portfolio.

The answer is that is probably no. This is because the portfolio, even though we acquired in January this year, the portfolio, I would say, is actually built up by the promoter, Enpal, over a number of years since, I would say, early 2020s. That was when interest rates are still low and attractive, right? So which is why for the German Solar Portfolio, we locked in a very good financing package, right, for the rest of the asset life. So something that we like a lot and are very comfortable with.

Yes. There was a pop-up question on potential pipeline of assets upcoming. Will the management team -- can the management share if there's any update on the Marina Desalination Plant or the onshore wind farm pipeline, please?

All right. I will take that question. So, for KIT, we are always on the lookout for interesting transactions. Immediate pipeline-wise, as you probably aware, we signed a term sheet with the sponsor Keppel Infrastructure to acquire the full economic interest in the Marina East Desal Plant. We are still progressing discussions with PUB, and we hope that the discussions with PUB will be completed soon. As and when we receive approval from PUB, we will make an announcement. For the drop downs, I think you are probably referring to the -- our onshore European wind farm. So, we have a 5-year at the inception of the transaction, about 1 or 2 years ago. We have an exclusive period of about 5 years, where for us or Fred. Olsen will drop down onshore wind farms that is developing into our platform. We are in discussions with them on drop downs. We have achieved 1 drop down, the Fabodliden II, 17 megawatts some time ago. And we are still in discussions with them for further drop downs. As and when things materializes, we will make an announcement.

I have another question. Is the team still actively seeking to unlock the value of the Ixom investments?

We started a strategic review of Ixom about 2 years back and that was probably in the 2021 or 2022 thereabouts. We have since then called the strategic review when the offer received wasn't up to our expectations. KIT, we are what we call a permanent capital vehicle. There's no need for us to exit from our investments. If we do receive attractive offer for Ixom, we will consider. But for now, I think we are committed to growing the business for the immediate future.

Next question. There is another question about pipeline of acquisitions. Can you also share if you have identified suitable assets from JinkoSolar [ platform ]?

Right. We have an MoU with Jinko Power. We are still evaluating transactions. As and when they propose something that is attractive to us, we will take a look, and then if there is -- if any transaction materializes, we will make an announcement.

One more question. Will the Trust be leveraging more on Keppel's network, to either Keppel Infrastructure pipeline or the Infrastructure arm of Keppel Capital Fund Management & Investments?

Yes. And that's definitely the intention. We -- KIT, we are part of the broader Keppel Group. We definitely wish to leverage on our sponsor for pipelines. And so, this is where we are in a very good position, because we have potential assets that we can acquire from our sponsor, with the Marina East Desal Plant being one of them, of course. And we also have the flexibility to acquire attractive assets from external parties. And besides acquiring assets from my sponsor, we also hope and certainly have plans to leverage on our sponsors' operating and technical capabilities to help create value in our portfolio companies. For instance, we could leverage on their health if we wish to undertake any expansion programs in our portfolio companies. For example, our waste to energy plants in Korea, et cetera and so on.

There's one more question. Given the distributable income performance, could management shed light on the sustainability of distribution over the longer term? This is given the various one-off adjustments that [indiscernible], please?

Right. So, KIT, it's -- we are a stable counter. Our operating assets are all supported by watertight contracts. Cash flows are stable. So, we do see that the DI that we declared -- I mean, the DPU that we declared is supported by the DI, the real cash that's received from our operating business. So it is in our opinion that the DPU or distribution that we declared is sustainable.

Yes, sure. Maybe let me add on to that. I think -- maybe let me give you a rather long-winded answer, right? Our cash flows is sustainable, because if you look at it, if you look at our portfolio, we have a growing portfolio of evergreen assets that is in very good position and generating very sustainable cash flows. So we expect our DI -- the sustainability of our DI to continue and, in fact, grow. There may be certain so-called one-offs or cash outflows due to timing. For instance, at Borkum 2 wind farm assets, we have biannual debt service -- debt repayment in the first quarter and third quarter of the year. For the German Solar Portfolio, we have debt amortizations that will happen in the second quarter and fourth quarter of the year. So whilst this may cause some volatility, right, in the DI, but these are more financing related and underlying operation performance of the assets are very stable.

I have 1 more question on our balance sheet. Could you remind us when is the term loan maturing?

So for the acquisition term loan, it is maturing in 2025.

It looks as if that there are no further questions from the participants. Will there be any last questions from the analyst?

Could I check on a couple of questions? Actually, I see Peggy has asked 1 question. She's asking for breakdown of DI between KMC and AGPC. And apart from that, I mean, Raymond briefly mentioned about EMK, right, that there are some pricing pressures, even though volumes are recovering. Could you expand on the competitive environment, how it is?

Okay. Maybe let me take the question on EMK, whilst we provide you with the breakdown of, I think, the energy transition assets, cash flow between AGPC and the other one. So EMK, I think the business operations over there is very stable. On the landfill side, we do see some weakness in the second quarter of the year. I would say, that's probably due to weak -- somewhat weaker construction activities in Korea in the first half of the year again. But we expect that to kind of resolve in the remaining part of the year, or maybe come early next. So the landfill, if you look at it, is essentially what I call a capacity business, right? We have a fixed -- a level with fixed capacity and we want to sell our capacity at the highest price possible. When the price is not attractive in a particular month, we probably say, "Hey, let's use -- let's accept less waste and reserve the capacity when the demand for landfill are higher, right?" So we have adopted that strategy, so that -- so as to ensure that we achieve the best possible pricing for our business on the landfill side. And, of course, we are always looking to see how we could secure an additional land to extend the longevity of our landfill business.

So, coming back on the question on the breakdown of AGPC DI, and also KMC. AGPC DI for the first half 2024 is SGD 23 million. For KMC is SGD 17 million.

I have a question on dividends. Will KIT give out a special distribution this year just like last year?

Okay. Maybe let me take that question. For KIT, we are committed to increasing our DPU by 1% to 2% by inflation over the long term. Special distribution could be considered if we manage to realize any value created at any of our portfolio companies, right? So this is not something that we can commit to. But as and when we create any value in our portfolio of businesses through a refinancing, et cetera and so on, we could consider sharing part of those values that they created through a special distribution.

Thanks, Kevin. Are there any further questions from the participants? If there are no further questions, then we will close this evening's call. Thank you, everyone, for joining us, and have a nice evening.