Keppel Infrastructure Trust (KPLIF) Earnings Call Transcript & Summary

Good morning, everyone. On behalf of the Trustee-Manager, thank you for joining Keppel Infrastructure Trust First Half 2025 Results Webcast. I'm Lilian from the Investor Relations team. Let me introduce the KIT management team. We have with us this morning, CEO, Mr. Kevin Neo; and CFO, Mr. Raymond Bay. We will begin the session with a presentation on KIT's first half 2025 highlights, followed by business and financial updates before we open the session for questions. For analysts, who are joining us on the Teams, please be reminded to mute your mic throughout the presentation. I will now hand the time over to Kevin for the presentation. Kevin, please. [Operator Instructions]

All right. Thanks, Lilian. Good morning, everyone, and thank you for joining us today. 1H 2025 DI was SGD 119.4 million, which is 31.2% higher year-on-year, compared to SGD 91 million in 1H 2024. This was driven by higher contributions from City Energy, IXOM, Ventura and the divestment of Philippine Coastal. Accordingly, DPU of 1.97 cents, an increase of 1% year-on-year. In further demonstration of our strategic capital recycling, KIT announced in June the sale of partial stake in Ventura, capturing the value uplift since our acquisition. The divestment is expected to be completed in 3Q. Together with the sale of the Philippine Coastal, which was completed in March, the 2 transactions are expected to give us SGD 301 million of divestment proceeds, which we can then be redeploy to fund yield-accretive opportunities. In April, we presented such opportunity in the form of our proposed investments of SGD 122.3 million in Global Marine Group, or GMG, which is a leading subsea cable service provider. The proposed investment would establish KIT's entry into the Digital Infrastructure segment to capitalize on the secular growth trend of global digitalisation. On pro forma basis, the acquisition is expected to deliver FY 2024 DPU accretion of 3.5%. The proposed acquisition is subject to regulatory as well as unitholders approval. The divestment gives KIT, greater financial flexibility to pursue growth opportunities without the immediate need to raise equity. Going to the next slide. With the completion of the sale of Philippine Coastal on 20th March 2025, KIT's AUM is SGD 8.7 billion as at 30th of June. Assuming the proposed acquisition of GMG is completed, our pro forma AUM including GMG will be SGD 9 billion. Going to the next slide, KIT has demonstrated a track record and continues to grow through acquisitions and value creation as summarized on this slide. I will now pass the time to Raymond to share more on the business updates.

Thank you, Kevin. I'll start with Energy Transition segment. City Energy recorded higher year-on-year town gas volume and service income for first half 2025 and fuel cost over-recovery. The sale of the Life brand gas water heater has more than doubled year-on-year and is expected to increase the demand for gas consumption. On the transition assets, KMC achieved 100% availability for first half 2025. Its higher efficiency upgrade, which is expected to improve reliability and lower carbon emissions was completed with the cost fully passed through. Aramco Gas Pipelines Company, in short AGPC, first half 2025 volume was 1% higher year-on-year and above the minimum volume commitment. However, FFO was lower due to higher interest paid in first half 2025 post refinancing in first Q 2025. Moving to the renewables portfolio. German solar portfolio is backed by 20 years lease contract and has provided stable distribution to KIT. Like other wind farms in the North Sea, BKR2 is experiencing unusually low wind speeds in first half '25. The wind resource has shown signs of recovery in May and June, indicating a return of normal atmospheric conditions. The Onshore wind farm portfolio completed its first drop down project, 49MW, which is expected to commence commercial operations in first half 2026. The next drop down with installed capacity to 88MW is expected in the second half 2025. Moving to the Environmental Services segment. EMK maintained full utilization of its incineration business. The lower operating costs, the landfill business will commence operations of its leachate treatment facility on-site in second half 2025. This is expected to reduce outsourcing costs of approximately SGD 1 million annually. FFO was lower due to continued volatility in the landfill price. Moving to the Singapore Waste and Water Assets. The plants remain stable fulfilling their contractual obligations. FFO was lower due to nominal contribution from Senoko post-extension of concession in 3Q 2024. This was the first full half-year contribution from KMEDP since acquisition in December 2024. As for SingSpring, we will continue to explore the concession extension with the regulator. Moving to the Distribution & Storage segment. IXOM continued to deliver stable performance driven by chemical manufacturing and distribution business in Australia and New Zealand. We also saw robust growth in the Bitumen segment, offset by lower growth from Life Sciences. The FFO decline is mainly due to weaker Australian dollar versus Singapore dollar. For Ventura, Ventura continued to reinforce its market-leading performance with 100% bus reliability. Ventura was awarded service routes extension for two existing contracts, and these are expected to commence in the second half of 2025. Philippine Coastal. As shared previously, Philippine Coastal was divested on 20th March 2025. Moving on to our financial and capital management. On slide 12, for first half 2025, we are declaring higher DPU of 1.97 cents for first half 2025. Payment of distribution will be on the 13th August 2025. The next slide, on Slide 13. This slide provides a breakdown of the first half 2025 DI. In the Energy Transition segment, we saw a decline mainly due to lower contribution from renewables and transition assets, which were partially offset by higher contribution from City Energy. In the Environmental Services segment, there was also a decline mainly due to Singapore concession being extended at lower rate, which was partially offset by contribution from KMEDP. In the Distribution & Storage segment, the increase was due to the first full year contribution from Ventura and higher contribution from IXOM. Overall, first half 2025, DI was 31.2% higher at SGD 119.4 million, which included the divestment gain from Philippine Coastal. Moving to Slide 14. This slide provides a snapshot of our balance sheet position. We maintained a strong balance sheet that is well capitalized to support our growth aspirations. KIT's net gearing level was at 39.3% and net debt to EBITDA was at 4.6x at first half 2025. Pending redeployment of the divestment proceeds, we have used the proceeds to repay existing borrowings. This level of gearing provides a comfortable headroom to support KIT's future growth. We continue to monitor risk exposure and safeguards against evolving market condition. To mitigate against fluctuating interest rate, approximately 80% of KIT's loan are hedged as at 30th June 2025. We hedged approximately 67% of the trust's foreign income to mitigate the impact of currency fluctuations. Moving to Slide 15. KIT does not have further significant refinancing requirements for 2025. We have SGD 565 million of loan facilities that are undrawn, providing KIT financial flexibility. I will now hand over to Kevin to share more on the market outlook.

Thanks, Raymond. Before we end the presentation, I'd like to share some thoughts on the infrastructure market outlook. Investment appetite for infrastructure assets is expected to remain strong as assets class continue to offer compelling blend of security, returns and long-term opportunities. Furthermore, secular growth trends such as a [indiscernible] decarbonization, deglobalization, demographic change, and digitalization, will continue to provide long-term tailwinds for the asset class. Looking ahead, the energy transition sector is poised to experience robust growth. According to Bloomberg, global energy and transition investment will need to average USD 5.6 trillion each year from now to 2030 in order to get on track for global net zero by 2050. Most of the global investment in 2024 go from sectors such as renewables, electric vehicles, power grids and energy storage. These sectors grew USD 1.93 trillion, growing 14.7%. Electrified transport was the largest investment driver, reaching USD 757 billion. Governments globally have also introduced incentives and regulations to spur demand and accelerate EV adoption. Moving on, we observed that the infrastructure supporting the secular economy will remain crucial. We continue to see demand for waste to energy and water treatment assets, supported by growth in [ total ] population, industrialization and climate change. KIT invest in essential infrastructure business that support access to clean water, including our most recent investment in KMEDP, Singapore's first dual-mode desal plant, which is crucial to ensuring Singapore's water security. In the Digital Infrastructure segment, we continue to see growing demand. According to Future Market Insights, the global submarine cable market is expected to grow from USD 30.9 billion to USD 56.9 billion by 2025 with a CAGR of 6.3%. The demand is largely due to globalization, global digitalization, growth in AI, data center growth as well as the accompanying infrastructure requirements. Our proposed acquisition of GMG will allow us to leverage on this growth trend. This is a strategic yield-accretive opportunity that will enhance the resilience of our portfolio. To conclude, we are confident that KIT is strategically positioned to harness the resilience of infrastructure assets while capitalizing on secular growth trends to deliver long-term value to our unitholders. With this, we end the presentation, and I'll hand the time back to Lilian for the Q&A.

Thank you, Kevin and Raymond. We will now open the session for questions. [Operator Instructions] Do we have the first question? Rahul.

Two questions, please. First, can you talk about the thought process behind the sale of stake in Ventura? What prompted that? Were you actively trying to sell a stake? Any details you can share on the sequence of events will be helpful. I'm just trying to understand how we should be thinking about portfolio management going forward. Are you trying to be much more active than, say, in the past? And second, can you give us some indications on how much of growth CapEx realization has happened so far? I think it will help us understand the FFO trends going forward.

Yes. Thanks, Rahul. So I think just on the sale of the proposed partial stake sale to Samsung. So I think that's not something that we actively pursue. So after we acquired Ventura, I think we received inbounds from various buyers, including Samsung, right? And I think Samsung is a party that us as a group is familiar with, and we have then decided to sell stake of up to 25 -- I think 24-plus percent, almost 25% stake to them, right? What motivates the sale? I think the price that they offer is interesting. I think more importantly is that I think Samsung can also help to grow the Ventura business, right? And I've always mentioned that the buses nowadays are not just box on 4 wheels, right? There is a lot of digital equipment inside the bus, right? A lot of IT is required to run the operations to ensure that the bus reaches the various bus stops on time and on schedule, right? And this is where the Samsung can be helpful, right? For instance, if you look at one of our Ventura bus in Victoria, you will see that there is at least probably 2 or 3 tablets on the driver console, right? And again, that's where we can help them Ventura -- Samsung can be helpful with the system integrations, with the purchase of the IT equipment and so on, right? And maybe I can get the...

Rahul, you asked about the CapEx spend?

Yes, specifically the growth CapEx.

Okay. So for the first half of 2025, the total growth CapEx funded by FFO is SGD 9.1 million for the entire group.

And can you give us overall growth CapEx spend, if it is okay?

So if you refer to -- sorry, our guidance, right, it's in our announcement, Slide 23. So the guidance is over there in terms of growth CapEx. We split it into Energy Transition, Environmental Services and also Distribution and Storage. So for Energy Transition, the guidance is SGD 26 million growth CapEx. Environmental services is SGD 8 million. Distribution and Storage is 31 million.

Right. I understand. Sorry, let me rephrase my question. I mean you mentioned, right, $9 million has been spent, which is funded by FFO. But there would be other CapEx, right, that would have been funded by debt? Because I think the growth CapEx in your slide would be a mix of both FFO and debt. So I'm just trying to understand that how much of this SGD 26 million plus SGD 8 million plus SGD 31 million we are already done with in 1H.

Yes. So for -- to answer your question, the maintenance CapEx is funded by debt for the first half of 2025 amount to SGD 31.9 million.

Thanks, Rahul. Can we have Ezien next?

It's Ezien from OCBC Credit Research. So I have two questions. The first one is, how is the Keppel Marina East Desalination Plant accounted for given that you only have -- you have 100% economic interest, but only 50% ownership. So is the debt taken on the balance sheet? And then the second question is, given that KIT is changing quite a bit, you're doing this divestment of Ventura and you're buying new assets. Are there any internal leverage target that management maintains? Yes, that's all from me.

All right. So I think for the transaction for KMEDP transaction, I think just to maybe clarify, right? Legally speaking, we own 50% of the asset, but we get on an economic interest basis, 100%, right? We do not consolidate the debt over there according to all the accounting standards. The reasons why my sponsor retains [indiscernible] because they are the operator of a plant, and we think it's important for them to also have a legal interest in the assets. So how -- essentially, how it works is that all the cash flows, all the DI generated by the assets will come to KIT.

And then just to answer your question on the gearing level. So as announced, our first half gearing ratio stood at 39.3%. We do have sufficient headroom. This is a very comfortable level for KIT to pursue our growth initiatives, to also share that our gearing financial covenants that's imposed by the lenders are way above the current gearing ratio of 39.3%.

Can I just quickly follow up? So on the -- you were saying that it's way above -- is that a number that you would share? Like what's the number?

Unfortunately, this is -- we don't disclose the financial covenants that's imposed by the lenders, but we do have sufficient headroom.

Okay. Then the other -- just a quick follow-up on the Keppel Marina East Desalination Plant. The debt that is taken for the acquisition, is that on a nonrecourse basis?

Yes, it is on a nonrecourse basis.

I think we also have a couple of questions from the webcast. Let me share questions. There's a question on whether will KIT be reviewing more divestment opportunities in the portfolio? And also, will we be looking at more infrastructure investments that are related to the AI space as AI requires a lot of energy in that space.

I think to the first question, for KIT, I think in the past, we had always adopted a long-term investment strategy. And when we make new investments, and we will do an equity fundraising. And over time, we realized that this may not be a very efficient method. And hence, I think in the last few quarters, we have informed that we will pursue a capital recycling strategy, right? So what we will do is we will invest, grow the business at the right time, monetize the asset, which and where we can actually take the gains and reinvest the gains for better yield and for better returns and so on. So that's the strategy that I think KIT will adopt. It basically means that we have more capital raising tools on hand, right? And that's the approach that we have followed with, I think, the sale of PCSPC as well as the proposed sale of a 25% stake in Ventura. In terms of AI-wise, whilst we do not pursue the AI trend, but I think we hope to also write the benefits that comes along with it, I'll say AI has driven a huge demand for data centers. But I'd like to say that data centers is probably not the only beneficiary of this trend. As more data is required, the whole digital infrastructure value chain will benefit. And I think this is a sector that I think KIT we want to be in, right? We are currently not in the digital infrastructure segment yet, but we hope to do so with the investment in GMG. And once that is done, I think we certainly are very much open to other investments in the digital infrastructure space.

We have one more question. This pertains to share price performance is strategically, how do we position KIT as we have seen share price decline for a period of next 3 years? And also how do we look at FFO?

Yes. So maybe I'll take the share price question first, right? I think in the last 6 months or 7 months, our share price came down and then went back up recently as well. I think there's a number of factors at play. I think one of the key factors was probably also the macro outlook. But I think we -- I think what we like to encourage our unitholders to look at KIT from a total returns perspective. So whilst -- and I think we need to probably compare KIT to the correct indices, right? So I would say year-to-date, our returns are probably on the lower end. But if you look across multiple range of periods, for example, our TSR for the 3-year period from FY 2022 to FY 2024 was about 10%. That's compared well against the CEE index of minus 11.1%, right? So I think if you take a longer-term basis, I think we did indeed has provided so-called attractive returns to our unitholders, right? And in terms of FFO-wise, our FFO has come down for a couple of segments in this first half. I would say one of the biggest drop is probably in our environmental segment. The drop is essentially due to the lower DI or lower FFO contribution from the Senoko Waste-to-Energy. Just again to recap, as Raymond has mentioned, the concession for Senoko Waste-to-Energy expired -- was expired in end of rather August 2024. It was extended for another 2 or 3 years. But however, it was extended with just a marginal incremental DI contribution. So as a result, we see a drop in FFO from Senoko Waste-to-Energy as a result of that. And this is something that I think management has been fully aware of and which is why since 2019, we have embarked on an investment strategy where we want to invest more in evergreen assets, right? The concessions was attractive assets. They were at some point in time, one day mature, right? And I think the right way to do it is to invest in more evergreen assets so that the DI and the FFO will be more sustainable. I think back in 2015, right, I think when KIT was first formed, fixed life assets account for about 80% of our portfolio, and I think as of end of last year, fixed assets account for 50%, evergreen assets account for 50%, right? So I think we have made a lot of good headway since 2019, right? And I think we will continue to invest in evergreen assets. We hope to push that to maybe a 60%-plus 70% level thereabouts. And then this, I believe, will give us a very good blend of so-called stable distributions as well as capital optimization and growth.

Thanks, Kevin. We have one question on refinancing. Can you share the potential impact of fixed term loan refinancing in 2026? We expect impact on IXOM DI from the refinancing?

So IXOM's loan is due end of second half of next year. We will typically start the conversation with the lenders for early refinancing towards nearer to the maturity date. In terms of the interest rate outlook, as you can see from the market, the interest rate trend has been coming down. Of course, this is subject to what FOMC call for the next couple of months of this year. I think FOMC curve is expecting another 2 cuts, but let's see what will pan out from there. We do expect the Australian dollar interest rate to come down as well.

I think we have a question from [indiscernible]

I have two questions. Sorry, if you have touched on this earlier. So the first one is in second half, there will be the second dropdown from your wind farm assets, right? So how should we think about this contribution? Can you share its financial performance, let's say, in the first half '25? And the second one is you have redeployed $122 million out of the $300 million divestment proceeds. Do you intend to pay down some of the debt first before the next acquisition? Yes. That's all my question.

Maybe, Raymond, do you want to answer the debt?

Yes, sure. Yes. You are right. So what happened was when we received the divestment proceeds from PCSPC, we have used the proceeds to pay down our debt. That is why you see a downtrend of our gearing to 39% this first half and also the improvement in terms of the net debt to EBITDA and the ICR ratios as well.

Pertaining your questions about the drop down for the Onshore wind farms. So yes, we are expecting drop downs in the U.K., but I'd like to kind of clarify that this is a somewhat small drop down. It will not be overly material to KIT. It's still undergoing construction at the moment. It will turn operational in the first half of 2026. But like I said, this is a rather small drop down or investments. So it will not generate or cause a huge increase to our DI or FFO.

I mean just to give you a sense, right, the size of this wind farm over there, for the first half of 2025, the contribution to FFO is only SGD 2 million.

We also have a question on EMK update. Could you share more on EMK update on landfill business?

So specifically for EMK, so I think just on EMK itself, the landfill business itself, I think we -- I think the outlook is still somewhat similar to what we have shared in the first quarter of this year. ASP remains bigger than what we saw 2 or 3 years ago. However, we are already starting to see ASP increases, right? But it has not reached the level where we think we want to sell our space. So we probably continue to maintain the strategy of building capacity and selling that capacity only when the ASP or the price level reached a point that we think is attractive enough for us to sell, right? But I would say, given the policy changes in Korea, I think over the short to midterm, we do expect price to increase, and we certainly hope that price will increase. And I think right now [indiscernible] as we have seen signs of price recovery.

Thanks, Kevin. Rahul has another question.

Just two more questions from my side. One, housekeeping. Can you share the split of DI between Aramco and KMC and also the European Onshore and BKR2? And finally, KMEDP DI as well for first half?

Rahul, just give me a second, yes.

Sure. Yes. Maybe meanwhile, I ask a second question, if that's okay.

Yes, go ahead.

Yes. Okay. Second is a bit of a longer-term view. If you -- like if I look at, right, 1H '25 versus 1H '24 funds from operations at an asset sub total level, so there is a gap of around SGD 23 million, like 1H '25 is lower FFO of SGD 23 million compared to 1H 2024. So how do you think -- I mean, you mentioned about, right, the capital recycling as the main focus going forward to increase the -- just to recycle the capital to move the assets and all. Do you think just by recycling, we can actually close this gap? Or it has to come a point where you need to do equity raise, invest in new assets so that you can close this gap of SGD 23 million? Because I assume that would be your first target, right, to come up to a stage where at least we have an FFO, which is flat year-on-year.

I'll put my thoughts across a couple of points, right? I think number one, yes, I'll say year-on-year, our FFO may have come down. But I think we'd like to kind of also mention that with the sale of PCSPC, we have about SGD 190 million of divestment proceeds. And once the -- and we will redeploy part of that into GMG. Once the sale of a partial stake sale in Ventura happens, we would probably have another SGD 100 million or so. So all in all, we probably have another -- putting aside GMG, right, we probably have another SGD 170 million or SGD 180 million of capital that we can deploy, right? Our gearing right now is about 39%. I would say that's a very conservative or very healthy levels. I think we have the bandwidth or the flex to gear up to invest. And this will help to also provide the capital for reinvestment. And so with the additional debt plus the reinvestment of the proceeds, I think we can actually generate a meaningful increase of FFO and DI. So I have mentioned that one of the costs for the weaker FFO this year is due to Senoko, right? And I think we have already done a few projects to replace that. Another reason why the FFO this year was a bit lower was also partly due to, I think, BKR2 and the Onshore wind farms, right? The wind speed for the first half of this year for BKR2 has been weak, right? And that's due to a pretty rare climate phenomenon that we are seeing in the North Sea, right? So as a result of which BKR2 is producing less energy, right? However, that started sometime in, I would say, late last year from December. I think from May, June, we have seen wind speed go back to normal. So again, hopefully, with the wind being back to normal now, we will see more contribution from BKR2 in the second half of this year. Another part to also explain that this climate's pattern, right, or this phenomenon that caused a low wind speed is probably somewhat quite rare. And it doesn't just -- it didn't just affect BKR2. It affected almost all the wind farms in the North Sea, right? When I spoke to other operators, they are also seeing somewhat same thing, right? So given -- and this is where I think my last point is that we want to grow our business through [indiscernible] means, right? I think the first is we will continue to sweat our asset harder. We will continue to grow our existing businesses, in particular, like City Energy, IXOM, Ventura and so on, right? And then we will still invest to create that alpha or the surplus DI/FFO again help to contribute to our distributions.

Rahul, coming back to you, you requested for the breakdown of AGPC and KMC for the first half 2025. So for AGPC is SGD 17 million and KMC is SGD 12 million.

What about European Onshore and BKR2 split as well?

European Onshore -- can we get back to you on this?

Yes. Yes, absolutely. Sure. No worries. If you have handy, then KMEDP as well.

Got it.

[indiscernible], you still have your hand raised. Just wondering whether you have another question.

So if time permits, can I ask a few more questions. So the first one is, can you share the breakdown for EMK's businesses? Because we understand that there is a few different segments under EMK, including fuel incinerator as well as with oil refiner. So yes, we're just wondering whether you can share a bit more on this. And also for wind farms debt amortization, will it be consistent at this level going forward? And also, could you share whether there is a growth target, let's say, your AUM target maybe in the next 3 years?

Yes. I'll probably start from the reverse order first, right? AUM target, yes, we have said that we want to grow. And so therefore, we have a certain AUM target. But I would say what's more important is that we do the right investment. When we come across the right investment, we will invest and we don't find a good investment, then we will not invest, right? So that's the process that we always follow, right? I think you have a question about the split between the various business segments of EMK. I would say, using last year's EBITDA performance for EMK, I would say probably about 50%, 60% comes from the incineration business. The balance comes from landfill and the waste oil and refinery waste oil treatment business, probably a bit more towards the waste oil because we have been controlling the sale of the capacity at the landfill.

I think you asked about the wind farm borrowings.

Yes, amortization, yes.

Yes. So for the BKR2, it's a project finance kind of amortization. So I think -- just give me a second. I'm just referring to the amort schedule. So for BKR2, right, just let me explain, right? For BKR2, there's certain debt at the asset [indiscernible]. Amortization happens twice a year, one time in Q1 and one time in Q3, right? Our share of the amortization is about EUR 40 million each first half, right, each quarter, right? So basically means you can think of it as EUR 40 million of amortization in Q1 and about EUR 40 million of amortization in Q3, right? But I say this EUR 40 million is a rough number. And the asset amortization each year is slightly different, but it doesn't deviate too much.

Okay. Got it. Got it. And also, I was having technical trouble to lower my hand. So I don't have any more questions.

Actually, any more questions from the analysts? If not, actually, I think we've also covered the questions from the webcast. There's only one -- perhaps one last question, which is just a quick clarification. There was a question on whether the current Cambodia and Thailand dispute has any impact on our business.

Yes. So I would say the impact is quite limited. We do not have any business in Cambodia. IXOM has a life science business and that life science [indiscernible] JV in Thailand. But this is a pretty small JV, right, not very material to us. So the impact to us is actually quite minimal. And we are monitoring that and see whether there will be any impact to the JV business, [indiscernible].

I think if there are no more questions from the analysts as well, we'll close this session. Thank you, everyone, for attending this session. You can always get in touch with us if you have any further questions after this. Thank you very much.