• For the first time since listing in its current avatar, KIT management increases DPU (albeit marginally) in 2H21 FY21 DPU of 3.78Scts up 1.6% over usual annual DPU of 3.72Scts
• Basslink under insolvency, deconsolidated from financials, frees up balance sheet for further debt-funded growth
• Strategic review under new CEO points towards bigger M& A ambitions, and this time, should be DPU accretive unlike in the past
• Maintain BUY TP US$0.60, currently trades at c.7% yield

FCFE (distributable cash flows) lower than expected in 2H21/ FY21, but management decides to reward unitholders with slightly higher DPU 

• KIT recorded FCFE of S$192.2m in FY21, down 15% y-o-y, and adjusted EBITDA of S$317.6m, down 3% y-o-y
• 2H21 FCFE was S$91.6m, down 18.5% y-o-y and 9% q-o-q, largely impacted by City Energy (previously City Gas) numbers as a result of the timing differences in the fuel price pass through gas tariff mechanism
• 4Q21 FCFE was S$46.9m, -30% y-o-y but +5% q-o-q, as the drag from City Energy was more than offset by good performance at Ixom
• Despite the lower than expected FCFE, management team decided to up DPU for the first time in years, from 1.86Scts in 1H21 to 1.92Scts in 2H21, to reward unitholders, as underlying businesses are performing well and City Energy earnings will smoothen out over time
• Full year DPU amounts to 3.78Scts for FY21, up 1.6% over FY20, and required DPU payout of S$188.7m is still well within the FCFE for FY21

Deconsolidation of Basslink following insolvency proceedings frees up balance sheet

• To recap, KIT&rsquo s problem asset Basslink entered voluntary administration on 12 Nov 2021 and operations are currently under control by the receiver and manager
• KIT thus deconsolidated Basslink related revenues, earnings, assets and liabilities from financial statements as discontinued operations
• Given that Basslink had net negative equity on balance sheet (liabilities > assets), this has helped lower Group level gearing (debt/ assets) from 32.1% as of end-FY20 to 20.3% as of end-FY21, and net debt/ adjusted EBITDA has similarly fallen from 4.2x to 2.9x
• Given that KIT can choose to lever up to at least 40% if not 50% (benchmarking with S-REITS), this frees up balance sheet for more than S$1bn+ of debt-funded acquisitions in future
• Management maintained that there are no further contingent liabilities related to Basslink at KIT level

Strategic review provides clearer acquisition roadmap

• Under new CEO, Mr. Jopy Chiang, KIT undertaken a strategic review of its portfolio and future plans
• Three key strategic growth pillars &ndash i) sweat existing assets harder (City Energy has new and upcoming business lines including EV charging stations), chase operating efficiencies, make bolt on acquisitions like the ones seen at Ixom in recent past, ii) leverage Keppel ecosystem for opportunities and access to funding, and iii) actively pursue inorganic growth opportunities that will be yield-accretive
• The inorganic story will focus on traditional asset classes like utilities, transmission & distribution assets, assets that benefit from energy transition story like renewables, digital and communications assets like towers that support the digital economy (not data centres, outside purview) and socio-economic infrastructure assets like roads and other transport infrastructure
• In terms of geography, KIT will focus on opportunities in developed markets in Asia-Pacific &ndash adding Japan and S. Korea to the purview apart from its existing markets of Singapore, Australia and NZ &ndash and select EMEA markets including UK, EU and UAE
• The decision to increase DPUs in 2H21 also signals that unlike in the past (read: Ixom and Philippine Coastal), KIT will be open to increasing distributions on the back of accretive acquisitions, in line with investor feedback
• KIT has recently increased its firepower by issuing S$200m MTN at 3% interest rate in December 2021 under its S$2bn Multicurrency Debt Issuance Programme

Last but not the least, sharpens ESG focus to stay in tune with the times

• In the past, KIT has been quite reticent about its sustainability plans, which was worrying, especially given its exposure to gas-fired power plants, petroleum storage tanks etc. among the asset portfolio, but things are changing now
• KIT has established a dedicated Board ESG committee to oversee long-term carbon and non-carbon targets and the implementation of KIT&rsquo s sustainability strategy, in line with global best practices
• Aligning itself to UN SDGs with 9 out of 17 goals identified as material &ndash among other targets, KIT will implement the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations to disclose climate-related risks and opportunities over the next 2 years, will look to achieve 30% carbon intensity reduction by 2030 based on 2019 levels, and increase exposure to renewable energy by up to 25% of equity-adjusted AUM by 2030
• While KIT had so far shied away from making investments in renewables related projects, current goals seem to indicate there will be more action on this front in the foreseeable future, though management will need to ensure adequate returns on capital by identifying the right pockets of opportunity in an otherwise crowded renewables market
• KIT currently has a MSCI ESG rating of &ldquo A&rdquo , 1 notch above &ldquo BBB&rdquo , which is typically considered investment grade ESG rating, and will be looking to improve its rating further

Given the DPU increase signal, Basslink story mostly behind us, and chances of further DPU accretion in the near future on the back of inorganic growth, KIT, with yield of 6.9% at current prices, promises to be a more exciting story in the times to come. Maintain BUY with TP of S$0.60.