KIT’s manager proposes to raise base fee by 10 times

Business trusts just have not taken hold of investors’ imagination — and their pockets — in the way that REITs have. The most pertinent question ahead of an EGM to be held on April 17 is: Will unitholders of Keppel Infrastructure Trust (KIT) vote for a new fee structure where they are likely to pay the manager higher fees?

The old base fee was $2 million a year with some adjustment for inflation. The new proposed base is 10% of distributable income, which in FY2021 was $192.2 million, taking the new base fee to $19 million if the new formula is used. If approved, the new fees will be implemented in stages as such a large jump immediately this year would impact distributions.

The rationale, according to KIT’s manager, is to have a greater alignment between KIT, the manager and unitholder. The manager also needs to increase bench strength as it outlines its new growth strategy.

The existing fee structure has been in place since June 2010 when K-Green Trust was listed as a business trust. The old performance fee of K-Green Trust was 4.5% of trust income.

At the time of listing, K-Green Trust managed only three concession assets and had only seven employees, which included three executive officers. K-Green Trust was renamed KIT in 2014. In 2015, KIT acquired CitySpring Infrastructure Trust.

KIT’s distributable income has grown from $49.2 million under K-Green Trust for FY2011 to approximately $192.2 in FY2021. At the end 2021, the manager undertook a strategic review of KIT’s strategy, operations and assets, and announced its refreshed strategy in January.

The manager plans to rebalance the portfolio mix to focus on core and core-plus infrastructure assets and businesses in the developed markets of Asia Pacific as well as Europe, the Middle East and Africa, focusing on jurisdictions with well-developed legal frameworks.

On Feb 23, KIT completed the acquisition of an indirect minority and non-controlling stake in Aramco Gas Pipelines Company through KIT’s indirect minority investment in a new special purpose vehicle formed together with reputable co-investors such as BlackRock Real Assets and Hassana Investment Company, which is the investment arm of the General Organisation for Social Insurance of the Kingdom of Saudi Arabia. This is expected to provide long term, predictable cash flows to KIT.

Currently, the trust’s portfolio consists of six concession-based/contractually-driven assets and three evergreen businesses. This includes the

Ixom Group, Philippine Coastal Storage & Pipeline Corporation and Aramco Gas Pipelines Company. KIT also holds City Energy, 51% of Keppel Merlimau Cogen, Senoko Waste to Energy Plant, Keppel Seghers Waste to Energy Plant, Keppel Seghers Ulu Pandan Newater Plant and 70% of SingSpring Desalination Plant.

The cash flow from the fixed life contract/concession-based assets will cease when they reach the end of their initial and/or extended contracts. Hence, KIT has started to acquire different asset classes with longer-term cash flows. Acquisition and divestment fees will remain at 1% of the acquisition price and 0.5% of the divestment price.

The new performance fee will be 25% of the difference in y-o-y DPU growth which aligns unitholders with the performance of the manager. Even then, the new base fee is likely to make up for any decline in performance fees.

In addition to a revised fee structure that appears to be beneficial for the manager, KIT’s manager also announced a strategic review of Ixom, which KIT acquired in 2019 for an enterprise value (EV) of A$1.1 billion ($1.12 billion), at an EV/Ebitda of 8.2x.

“In our view, an Ixom sale appears opportunistic, following good asset performance since its acquisition in 2019, coupled with conducive market valuations. We note that Australian-listed peer, DGL Group, listed at 9.0x [estimated] EV/Ebitda in May 2021 has since re-rated to 16.4x estimated EV/Ebitda,” notes Credit Suisse in an update. “Assuming a 10x–16x FY2022 EV/Ebitda transaction multiple (3.5%–5.6% implied yield), Ixom could potentially be valued between A$1.59 billion and A$2.55 billion,” Credit Suisse adds.