Company Coverage - K Green Trust (KGT)

Overview

K Green Trust (KGT) is a business trust with an investment focus on green infrastructure in Singapore, as well as Asia, Europe and the Middle East. It is a spun off from Keppel Corp, which continues to manage the trust and holds a 49.2% stake.

Key Assets

KGT currently own 3 assets:

From Company's Prospectus

1) Senoko Waste to Energy Plant, concession ends in 2024

It is the third waste incineration plant built in Singapore and is one of the four waste incineration plants operating in Singapore as the Last Practicable Date. Senoko is equipped with six incinerator-boiler units and 2 condensing turbine-generators with a power generation capacity of 2 X 28 MW.

From Company's Prospectus

2) Keppel Seghers Tuas Waste to Energy Plant, concession ends in, concessions ends in 2034

It is the 5th waste incineration plant built in Singapore. The Tuas plant is equipped with 2 incinerator-boiler units with one condensing turbine-generator offering a power generation capacity of 22 MW.

From Company's Prospectus

3) Keppel Seghers Ulu Pandan NEWater Plant, concession ends in 2027

 Ulu Pandan Plant is the 4th NEWater plant in Singapore and has been operational since 2007.

Key Investment Highlights

1) Stable Distribution

Like any business trust, KGT pays out 90% of its cash flow. In addition, KGT's cash flow is underpinned by its stable contract with 2 government agencies - National Environment Agency and PUB. Thus with contract coming from this 2 government agencies, I think the risk is pretty minimum here. In addition, KGT has exhibited a stable distribution since it listing and I don't see why the number will decrease given that they are on government contracts.

From Company's Presentation

2) Keppel Corp is a strong sponsor

Being a blue chip counter, Keppel Corp is effectively a very strong sponsor for KGT. In addition, as shown by the diagram below, KGT will benefit from future injection of assets or referral opportunities from Keppel Corp. This will only allow the company to grow. Equity investor will love growth and this provide a form of capital appreciation potential.

From Company's Prospectus

Below set out a list of asset in which KGT has the first right of refusal:

From Company's Prospectus

3) Potential to leverage up its balance sheet for expansion

As of 1Q13, KGT continues to be debt free. This ensures that the company has the potential to expand via leveraging up its balance sheet by doing yield accretive debt-financed acquisition, providing a potential upside to the stock.

Key Risk

1) Trading at a premium.

As of yesterday closing price of S$1.0395, you are paying a premium of 2.5cents against its 1Q13 NAV(net asset value) is at S$1.01. However I'm not very concern by it given how most of the REIT is trading at a premium to its NAV. In addition, given its last annual DPU of 7.82 cents, it is providing a historical dividend yield of approximately 7.52%(0.0782/1.0395), significantly higher than a lot of the existing REITs. And with the yield hungry environment of today (thanks to the ZIRP of the central banks), I think 7.52% is very decent. 

2) Asset will be transferred once the concession expire.

One of the biggest risk for investing in KGT Once the concession for the assets are up, KGT will transfer back to the government agencies for effectively nothing!! 

This issue was apparently highlighted by one of the security analysts on 16 Apr 2013 and I personally suspect the big drop we witnessed is due to that particular report.

From Yahoo Finance

Well, all I can say is a BIG thank you to that analyst, as with the big drop, the market has already priced in this risk!!! 

So I don't think this risk is a concern going forward, as like I mentioned, the market has already priced this in.

Conclusion

I think the risk to this investment is MID.

I think KGT is interesting as it 1) give me a decent dividend yield (approx 7%) 2) backed by a strong sponsor (ensure that I can sleep well at night) and 3) the biggest risk (concession expiry) is already priced in.