You are on page 1of 18

Singapore Company Focus

K-Green Trust
Bloomberg: KGT SP | Reuters: N/A

DBS Group Research . Equity 25 Jun 2010

Green is the colour of Cash


HOLD IPO Price: S$1.13
• “Green” assets with steady long term cash flow
STI : 2,847.61
• Zero debt balance sheet will enable growth
(Initiating Coverage)
• However, growth pipeline is limited at this point
Price Target : 12-Month S$ 1.20
Reason for Report : Initiating Coverage • Projected DPU yield of 6.9% not far from peers;
Potential Catalyst: Larger and more visible acquisition pipeline initiate coverage with HOLD and TP of S$1.20
Stable, long-term cash flows. The initial portfolio of K-
Analyst Green Trust (“KGT”) consists of two Waste-to-Energy
Suvro Sarkar +65 6398 7973
suvro@dbsvickers.com (incineration) plants as well as a water recycling (NEWater)
plant in Singapore, with concession terms ranging from 15-
25 years. The net cash flow generated will mostly comprise
availability payments i.e. the fixed part of total payments,
which will be paid as long as the contracted treatment
capacity is made available, irrespective of actual volume
treated. Counterparty risk is also minimal as off-takers are
Forecasts and Valuation Singapore Government entities. Management has projected
a DPU of 3.91Scts for the 6 months of FY10 and 7.82Scts
FY N/A (S$ m) 2010F 2011F
for FY11, implying an yield of close to 7% at listing price.
Turnover 67 84
EBITDA 15 30 Zero debt balance sheet could support inorganic
Pre-tax Profit 7 14 growth. While the potential for organic growth is limited,
Net Profit 7 14
Net Pft (Pre Ex.) 7 14 the Trust does have the balance sheet flexibility to pursue
EPS (S cts) 1.1 2.1 inorganic growth, as it is debt-free at the time of listing.
EPS Pre Ex. (S cts) 1.1 2.1 The Sponsor has provided a pipeline of 4 assets as part of
EPS Gth Pre Ex (%) N/A 91
Rights of First Refusal (“ROFR”) deed, but these assets will
Diluted EPS (S cts) 1.1 2.1
Net DPS (S cts) 3.9 7.8 need to be warehoused by the Sponsor until they are
BV Per Share (S cts) 108.8 103.1 operationally stable, and the smaller size of the ROFR
PE (X) 89.4 46.9 portfolio means that even injection of the whole portfolio
PE Pre Ex. (X) 89.4 46.9
P/Cash Flow (X) 43.6 22.1 would only potentially enhance FY11 DPU by less than 5%.
EV/EBITDA (X) 38.0 19.7
Net Div Yield (%) 3.9 7.8
HOLD, for now. Given its debt-free balance sheet and
P/Book Value (X) 0.9 1.0 steadier non-cyclical cash flows than some peers, we expect
Net Debt/Equity (X) CASH CASH KGT could trade at a slight premium to other infrastructure
ROAE (%) 2.1 2.0 business trusts. Given the historical trading ranges of peers,
Consensus EPS (S cts): - - we believe KGT could trade between 6-8% target yield,
which would imply a share price range of S$0.98 – S$1.30.
ICB Industry : Financial Our valuation, based on a slight premium to peers (6.5%
ICB Sector: Equity Investment Instruments
target yield) is S$1.20. Initiate with HOLD, catalysts could
Principal Business: K-Green Trust is a infrastructure business trust
with investments in "green" infrastructure assets come from a larger and more visible acquisition pipeline.

Note: Figures for 2010 represent the period from listing date to 31st At A Glance
Dec 2010 (approximately half-year) Issued Capital (m shrs) 639.1
Source of all data: Company, Bloomberg Mkt. Cap (S$m/US$m) 722.1 / 515.8
Major Shareholders
Keppel Integrated Engrg (%) 49.0%
Temasek Holdings (%) 10.6%
Free Float (%) 40.4%

www.dbsvickers.com
Refer to important disclosures at the end of this report
ed:MY / sa: JC
Company Focus
K-Green Trust

SWOT Analysis
Strengths Weakness

• Portfolio of operating assets with stable non-cyclical cash • Organic growth limited to inflation adjustments, as
flows capacity is unlikely to increase in short term

• Large proportion of availability-based payments, variable • Tariffs are regulated by concession agreements with
output charges passed through Government bodies, and scope for revisions are limited

• Counterparties are Singapore government entities, hence • Equipment downtimes at older plants may cause
limited credit risk reduction in tariff payments

• Strong support form sponsor group, Keppel Corp in the


form of a pipeline of ROFR assets

Opportunities Threats

• Zero debt balance sheet gives the Trust flexibility to grow • Change in government regulations regarding ownership
through debt-funded DPU accretive acquisitions and operation of public utility assets could impact the Trust

• Growing trend for governments to promote “green” assets • Change in input waste quality or input water quality, or
will add to acquisition opportunities, over and above projects change in environmental regulations could increase costs of
won by sponsor group treating the waste/ wastewater

• The presence of Temasek Holdings, as a ~60% deemed


shareholder in the Trust (through its 21% ownership of
Keppel Corp), could make financial transactions easier

Source: DBS Vickers

Page 2
Company Focus
K-Green Trust

Valuation in China) and lack of counterparty risks, we expect KGT


could trade at a slight premium to the other infrastructure
Singapore peers have traded at between 6-10% dividend business trusts. However, given the historical trading ranges
yield. Listed comparables to K-Green Trust would include of peers, we believe KGT could trade between 6-8% target
other utility/ infrastructure business trusts like CitySpring and yield, which would imply a share price range of S$0.98 –
Hyflux Water Trust, who have historically traded in the range S$1.30. Our valuation, based on 6.5% FY11 target yield – a
of 6-10% forward dividend yield in up to mid cycles. They slight premium to lower band of average peer valuation of
are currently trading at 7-8% FY11 dividend yield, which is a 7-8% – is S$1.20.
slight discount to the implied 6.9% FY11 yield projected by
KGT management, based on a listing price of S$1.13. Initiate coverage with HOLD. Given the limited upside to
proposed listing price, which we consider fair, we initiate our
KGT can trade at a slight premium to peers but likely range coverage on the stock with a HOLD recommendation.
bound. Given its debt-free balance sheet (unlike CitySpring’s Catalysts would come from a larger and more visible
heavily levered structure), steady non-cyclical cash flows acquisition pipeline, as well as debt-financed DPU accretive
(unlike Hyflux Water Trusts’s cash flows from industrial parks acquisitions in the medium term.

Peer valuations

Company FY End Price Mkt Cap DPU estimates (local $) DPU Yield (%) P/BV Govt Bond Avg. Yield
(local $) (US$m) Yield (2Y) Spread
Curr Yr Next Yr Curr Yr Next Yr Curr Yr Next Yr

Australia
DUET Jun 1.67 1272.1 0.20 0.21 12.0% 12.4% 7.1
Envestra Jun 0.495 600.7 0.06 0.06 11.7% 11.3% 1.3
Hastings Div Utilities Dec 1.31 570.0 0.12 0.12 9.2% 9.0% 1.1
Macquarie Airports Dec 2.85 4641.4 0.21 0.21 7.4% 7.5% 1.0
SP Ausnet Mar 0.795 1881.8 0.08 0.08 10.2% 10.3% 4.0
Average 10.1% 10.1% 4.6% 5.5% 5.5%

US
Enbridge Energy Dec 51.39 5967.4 4.03 4.14 7.8% 8.1% 1.6
Enterprise Products Partners Dec 34.36 21965.5 2.33 2.46 6.8% 7.1% 2.2
Buckeye Partners Dec 56.85 2927.8 3.87 4.08 6.8% 7.2% 2.4
Average 7.1% 7.5% 0.7% 6.5% 6.8%

Singapore
MIIF Dec 0.47 439.7 0.03 0.04 6.4% 8.1% 0.6
Hyflux Water Trust Dec 0.65 141.2 0.05 0.05 7.2% 8.3% 0.9
CitySpring Mar 0.595 420.3 0.04 0.04 7.1% 7.1% 1.4
K-Green Trust Dec 1.13 722.2 0.04 0.08 6.8%* 6.9% 1.1 0.5% 6.4% 6.4%
Average (excl .KGT) 6.9% 7.8% 0.5% 6.4% 7.3%
*Annualised yield
Source: Bloomberg, DBS Vickers

Page 3
Company Focus
K-Green Trust

What is K-Green Trust? The key assets. The mandate for KGT is to invest in “green”
infrastructure assets, comprising waste management, water
K-Green Trust (“KGT”) was constituted as a business trust in and wastewater treatment, renewable energy, energy
July 2009, and as of listing date in June 2010, will constitute efficiency and other “green” initiatives in Singapore, Asia,
the assets of two waste management plants as well as a Europe and the Middle East. To start off, KGT’s portfolio
water recycling plant in Singapore. Its sponsor is Keppel consists of the Senoko incineration plant, the Tuas Waste to
Integrated Engineering (“KIE”), the wholly owned Energy (“WTE”) plant and the Ulu Pandan NEWater plant, all
environmental engineering arm of Keppel Corp Limited located in Singapore.
(“KCL”), one of Singapore’s leading conglomerates with
interests in oil and gas, utilities and property development.

Snapshot of initial portfolio of assets


Name of Plant Year Built Concession Start Date Concession Period Design Capacity
Senoko Incineration Plant 1992 Sep-09 15 years 2,400 tonnes/ day
Tuas DBOO WTE Plant 2005 Oct-09 25 years 888 tonnes/ day
Ulu Pandan NEWater Plant 2005 Mar-07 20 years 148,000 cu m/ day
Source: Company, DBS Vickers

Corporate structure of KGT (as of listing)

Source: Company, DBS Vickers

How does Keppel Corp benefit? Of the three assets, KCL In future, sponsor KIE will be able to release cash by divesting
acquired the Senoko and Tuas Waste-to-Energy (“WTE”) capital-intensive BOT or DBOO projects to the Trust, and thus
plants in 3Q09 and 4Q09 respectively, and along with the Ulu recycle capital in order to invest in new projects.
Pandan NEWater plant, injected all three into KGT in order to
create a “green” infrastructure fund raising platform as well Keppel Corp will retain a 49% interest in the Trust, and will
as benefit from tax incentives under the Singapore distributed the remaining 51% shareholding in KGT to its
Government’s Qualifying Project Debt Security (“QPDS”) shareholders via a dividend in species of one KGT unit for
incentive scheme. every 5 Keppel Corp shares held.

Page 4
Company Focus
K-Green Trust

The Waste Incineration Plants recovery, while the remaining non-incinerable waste is
disposed of at the Pulau Semakau landfill.
Prior to 1978, substantially all solid waste generated in
Singapore was disposed by landfills. In recent years, Incineration is a waste treatment technology involving the
combustion has become the preferred mechanism for waste combustion of organic materials and/or substances.
management, due to developments in low-emission Incineration of waste materials converts waste into
incinerators and recognition that land disposal of solid waste incinerator bottom ash, flue gases, particulates, and heat,
leads to long-term pollution problems, particularly where which can in turn be used to generate electric power. Flue
hazardous waste is involved. Thus, today approximately 90% gases are cleaned of pollutants before being dispersed into
of Singapore’s solid waste is incinerated with energy the atmosphere.

General processes of a waste incineration plant

Source: Company

List of Waste-to-Energy Plants in Singapore

Source: Company

Page 5
Company Focus
K-Green Trust

The Senoko Plant incineration plant in Singapore built under the public-private-
partnership initiative. It was built with Keppel Seghers’ in-
Only incineration plant outside of Tuas. Located in the house technologies and is the first waste incineration plant in
northern part of Singapore, Senoko Plant is the third waste Singapore to showcase WTE (waste-to-energy) technology
incineration plant built in Singapore and is one of the four from a Singapore company. Tuas DBOO Plant commenced
waste incineration plants currently operating in Singapore. commercial operations on the Tuas DBOO PCOD. It boasts
Since August 2009, it is also the only waste incineration plant two incinerator-boiler units with one condensing turbine-
located outside of Tuas, and is positioned to serve the generator offering a power generation capacity of 22 MW.
eastern, northern and central areas of Singapore.
Commissioned in 1992, it boasts six incinerator-boiler units Key details of Tuas DBOO Plant
and two condensing turbine-generators with a power Owner Tuas DBOO Trustee
generation capacity of 2 x 28 MW. Senoko Trust acquired Plant Type WTE waste incineration plant
Senoko Plant on 31 August 2009 for S$454 million on a Location Tuas, Singaopore
willing-buyer, willing-seller basis and it commenced Status Operating
commercial operations under Senoko Trust thereafter. Type of concession Tuas DBOO ISA
Term of concession 25 years, commecing 30 Oct 2009
Key details of Senoko Plant Contracted capacity 800 tonnes per day
Off-taker NEA
Owner Senoko Trustee
O&M operator Keppel Seghers
Plant Type WTE waste incineration plant
EPC contractor Keppel Seghers
Location Senoko, Singapore
Status Operating Source: Company
Type of concession Senoko ISA
Term of concession 10 years, commencing 1 Sep 2009 A view of Tuas DBOO Plant
Contracted capacity 2,100 tonnes per day
Off-taker NEA
O&M operator Keppel Seghers
EPC contractor for flue
gas upgrade Keppel Seghers

Source: Company

A view of Senoko Plant

Source: Company

Availability based payments dominant. The bulk of revenues


under the concession agreements comprises of the “Fixed
Capacity Payments”, which are availability based and are
payable in full if the available incineration capacity of Senoko
Plant and Tuas DBOO Plant is greater than or equal to 2,100
tonnes per day and 800 tonnes per day, respectively. If the
Source: Company
available incineration capacity is less than 2,100 tonnes per
day, the Fixed Capacity Payments will be reduced accordingly.
The Tuas DBOO Plant These payments comprise a fixed capital cost component,
and a fixed O&M cost component, both adjustable for
First WTE plant built by Keppel. to Located in the western
inflation. Both are computed based on the available
part of Singapore, Tuas DBOO Plant is the fifth waste
incineration capacity of Senoko Plant and subject to
incineration plant to be built in Singapore and the newest of
deductions if certain performance standards are not met. The
the four waste incineration plants. It is also the first waste

Page 6
Company Focus
K-Green Trust

fixed O&M cost component of the Fixed Capacity Payments Keppel O&M Operator. This mechanism allows the O&M fees
covers the fixed O&M fees payable to the Keppel O&M payable to Keppel O&M Operator to be passed through to
Operator as well as property tax, trustee management fees, NEA with the effect that the effective income of the sub-
licensing fees and insurance costs incurred by Senoko Trust. trusts to be derived from the fixed capital cost components of
the Fixed Capacity Payments. In addition, the sub trusts will
Variable payments include electricity export component. The receive a variable electricity generation incentive payment,
other component of revenues is the “Variable Payments”, which is computed based on a percentage of revenues from
which are payable for the variable costs in incinerating waste the volume of electricity exported by the plants to the
and exporting electricity to the NEMS. The variable O&M cost National Electricity Market of Singapore.
component covers the variable O&M fees payable to the

Illustration of type of payments in and out of Senoko and Tuas sub-trusts

Source: Company

Illustration of approximate proportion of fixed and variable payments received by Senoko and Tuas sub-trusts

Source: Company

The Water Reuse Plant


Need for alternative sources of water in Singapore. Singapore remainder of the supply being imported from Malaysia.
does not possess significant freshwater rivers or Lakes and Historically, Singapore relied on imports from Malaysia to
until recently, the primary water source has been rainwater supply half of its water consumption. The two water
collected in reservoirs and catchment areas with the

Page 7
Company Focus
K-Green Trust

agreements that supply water to Singapore are due to expire desalination and water reuse to be at least 25% of
in 2011 and 2061. Singapore’s total water demand by 2012. The non-
conventional sources currently supply about 15-20% of
NEWater is a key resource. To improve water self-sufficiency, Singapore’s water consumption. NEWater is reverse osmosis
the Singapore government has committed to increase the water that is free from viruses and bacteria and contains very
supply of water from non-conventional sources, such as low levels of salts and organic matter.

NEWater Plant: General Treatment Process

Source: Company

Output should increase with acceptability. The NEWater m3/day of NEWater is added to the rainwater collection
production uses a multiple barrier approach with reservoirs to naturalise the reclaimed water. This constitutes
microfiltration or ultrafiltration, reverse osmosis, and about 1% of total potable water consumption, a level that
ultraviolet disinfection to produce high-quality water, which is should progressively increase to about 2.5% by 2011. With
well within the World Health Organisation drinking water efficiency gains and lower costs of NEWater production, the
standards. Singapore will continue to expand its NEWater NEWater price fell from S$1.3/m3 in 2003 to S$1.0/m3
capacity by 340,000 m3/day so that it supplies 40 percent of in 2007. The number of NEWater users subsequently
Singapore’s total water needs by 2020. Currently, 12,000 increased from 24 in 2003 to 327 in 2009.

List of NEWater plants in Singapore

Source: Company

Page 8
Company Focus
K-Green Trust

The Ulu Pandan Plant Plant. If the available production capacity is less than 148,000
m3/day, the Availability Payments will be reduced accordingly.
Fourth NEWater plant. Ulu Pandan Plant is located in the
central part of Singapore. In 2005, PUB awarded the contract A view of Ulu Pandan NEWater Plant
to Ulu Pandan SPC to design, build, own and operate Ulu
Pandan Plant under a public-private-partnership initiative, to
meet demand from industrial and commercial sectors in the
western and central regions of Singapore. Ulu Pandan Plant is
the fourth operational NEWater plant in Singapore and one
of the largest wastewater recycling plants operational in East
Asia. Modular design, space saving measures and energy
saving features lower operating costs.

Key details of Ulu Pandan Plant Source: Company


Owner Ulu Pandan Trustee Output payments, on the other hand, are payable based on
Plant Type NEWater Plant the net amount of NEWater delivered by Ulu Pandan Plant to
Location Ulu Pandan, Singaopore PUB at delivery points. The Availability Payments and the
Status Operating
Type of concession NEWater Agreement Output Payments will cover the O&M fees payable to Keppel
Term of concession 20 years, commecing 28 Mar 2007 Seghers as the O&M operator of Ulu Pandan Plant as well as
Contracted capacity 148,000 cu m per day of NEWater property tax, trustee management fees, licensing fees and
Off-taker PUB insurance costs incurred by Ulu Pandan Trust.
O&M operator Keppel Seghers
EPC contractor Keppel Seghers Variable power payment component adds uncertainty.
Overall, the effective income of Ulu Pandan Trust is derived
Source: Company
primarily from the fixed capital cost recovery payment
component of the availability payment and potentially from
Availability payment forms a lower proportion of net payout the variable power payment component of the output
than WTE plants. Under the NEWater Agreement, the Ulu payment. However, it is possible that the variable power
Pandan Trustee will receive both availability payments and payment component in the output payments may not
payments based on effective output. As the name implies, sufficiently cover the actual usage charges incurred by the
availability based payments are payable for availing the plant, as actual charges incurred vary with the cost of fuel
warranted production capacity of 148,000 m3/day and may be higher or lower than the reference cost (which is
throughout the term of the NEWater Agreement, regardless based on the monthly average 180cST HSFO for previous 12
of whether Ulu Pandan Plant produces any NEWater, months) used in calculating the payment component.
ensuring a long-term, predictable cash flow for Ulu Pandan

Breakdown of fixed and variable payments received by Ulu Pandan Plant from PUB

Source: Company

Page 9
Company Focus
K-Green Trust

Management Team
The key management team of KGT has been seconded from start building an independent team and phase out the
the talent pool of Keppel Group, as part of the initial support secondment arrangements when the assets of KGT grow to
in providing required resources, services and experiences around S$1.0 billion.
during the start up phase of KGT. The Trustee Manager will

Key Management Team

Manager (Age) Current Appointment Experience

Mr. Thomas Pang CEO Previously the general manager overseeing the investment, mergers and
Thieng Hwi (45) acquisitions and strategic planning of Keppel O&M Ltd. Previously has been
involved in fund raising, business development activities and also served as VP of
Singapore Tourism Board as well as assistant head at Economic Development
Board, Singapore. Holds a Master of Arts degree from University of Cambridge.

Ms. Kang Leng Hui CFO Previously the Finance Manager at Keppel Corp Ltd, responsible for value
management, management reporting and other financial matters. Prior to joining
KCL, she worked at Pricewaterhouse Coopers as an Audit Manager. She holds a
Bachelor of Accountancy Degree from NTU and is a member of CPA, Singapore.

Ms. Foo Chih Chi Senior Investment Manager Previously part of KCL’s strategic development and planning division. From 2008 to
2009, she was seconded to Alpha Investment Partners, where she was a senior
investment manager, specialising in structured real estate investments. She holds a
Bachelor of Business Administration degree from the University of Michigan.

Mr. Koh Hee Song Senior Adviser Currently senior adviser to Keppel Seghers in matters pertaining to solid waste
management, he has held various positions with NEA and the Ministry of
Environment in his long public service career. Last served as the Head of
Engineering Services of NEA until retirement in 2003. Has been awarded Public
Service Medals and Long Service Medal by the Singapore Government.

Source: Company

Various management fees and comparisons with other listed business trusts
K-Green Trust CitySpring Hyflux Water Trust

Base Fee Fixed fee of S$2.0m per annum, adjusted 1% of market capitalisation subject to
for inflation every year minimum of S$3.5m per annum None
Performance Fee
20% of total return on units in any quarter
above the total return on MSCI Asia Pac (ex- Tiered structure ranging from 5% to
4.5% per annum of the sum of all cash Japan) Utilities Index, taking into account 30% of adjusted EBITDA, depending
inflows prior period underperformance on the level of EBITDA generated
Acquisition Fee

0.5% of investment value if acquired 0.5% of investment value if acquired


from Sponsor or related parties, 1% in from Sponsor or related parties, 1% in
other cases None other cases
Divestment Fee
0.5% of divestment value None 0.5% of divestment value

Total fees as a %
of net cash
generated (est.)
About 9% About 9-10% About 5-6%

Source: Companies, DBS Vickers estimates

Page 10
Company Focus
K-Green Trust

The Growth Pipeline


The Sponsor has granted KGT certain rights of first refusal Trust until they attain steady state operations. The Sponsor
(“ROFR”) pursuant to a ROFR deed, which will come into will support KGT by warehousing these greenfield projects
effect on the date of listing. The ROFR deed applies to any until these projects achieve a more sustainable and steady
asset, in which the Sponsor or any of its subsidiaries hold cash flow stream, after which it will be offered to KGT for
more than 50% interest and provides such services as falls divestment purposes.
within the Trust’s investment mandate. As if listing date, the
ROFR portfolio consists of 4 assets, including 3 district cooling We estimate that the total book value of these 4 assets could
systems in Singapore and a WTE plant in Sweden, details of only add up to about 15% of the book value of initial
which are highlighted in table below. portfolio and hence, may not be a significant growth driver.

Some of these assets in the pipeline may not be fully


operational at this point, and will not be injected into the

Details of ROFR Assets

Name of Plant Location Description Design Capacity Remarks

Biopolis DCS Plant Biopolis@one-north, A district cooling system, wholly-owned 25,750 RT Keppel acquired
Singapore by Keppel DHCS Pte Ltd First DCS (previous
owner of the 3
Changi DCS Plant Changi Business Park, A district cooling system, wholly-owned 13,000 RT
plants) for S$88m
Singapore by Keppel DHCS Pte Ltd
from JTC Corp in
Woodlands DCS Plant Woodlands Wafer Fab A district cooling system, wholly-owned 10,100 RT December’09
Park, Singapore by Keppel DHCS Pte Ltd

Amotfors Energi WTE Sweden A combined heat and power WTE plant 190 tonnes/ day Keppel Seghers
Plant which is 22% owned by Keppel Seghers won a S$75m EPC
contract in April’08

Source: Company

How does the ROFR pipeline impact distributions?

Assuming fully debt-financed acquisition. We try to create a increase the DPU payout by about 7%, when fully debt-
scenario analysis of the impact on FY11 DPU if the Trustee- funded at reasonable rates. Given the nature of assets
Manager were to inject the above assets (or 3rd party assets) described above, cash flow yield may not be as high, debt
into the Trust in FY11. Thus, if we were to assume all the funding may not be cheap, and equity funding may not lead
~S$100m of ROFR assets injected at the beginning of the to any significant DPU accretion. Thus, more realistically, DPU
year at a cash flow yield of 7.5%, it would potentially accretion from ROFR assets may be limited to below 5%.

Scenario Analysis – Potential FY11 DPU enhancement through acquisitions


Cash flow yield of acquired asset
6.0% 7.0% 8.0% 9.0% 10.0%
Acquisition
Value

50 2% 3% 4% 5% 6%
100 4% 6% 8% 10% 12%
150 6% 9% 12% 15% 18%
200 8% 12% 16% 20% 24%
Source: DBS Vickers estimates

Page 11
Company Focus
K-Green Trust

Key Risks

Equipment/ plant downtimes. If the time required for repairs post historical financial numbers, and thus our assessments
and maintenance is more than expected or such events are only based upon forecasts and projections by
occur more frequently, it could affect the contracted management, rather than our own estimates.
capacities of the respective plants, and the sub-trusts would
not receive full availability payments from the off-takers. As Government rules and regulations could change. Changes in
a safeguard, the Keppel Seghers O&M operator will be liable regulations in the “green” infrastructure business could
up to 30% of the fixed annual O&M fee in case of payment impact earnings, if new environmental laws enforce stricter
reductions arising out of plant downtimes, but any damages controls or limits on existing assets, which require additional
beyond that will be borne by the sub-trusts. capital expenditure and operating expenses.

Based on the deduction formulae in the respective Senoko upgrade must be on time. According to conditions
agreements, the capacity deduction equivalent to this 30% set out in the Senoko agreement, the Senoko trustee will
capped amount will be reached when: have to complete the Flue Gas Treatment Upgrade within
the stipulated time frame, failing which the Trustee would
i) Senoko Plant available capacity drops below 66.04% be in default of the agreement, seriously affecting
ii) Tuas DBOO Plant available capacity drops below operations.
74.46%
iii) Ulu Pandan Plant available capacity drops below Energy costs and payments at Ulu Pandan plant are not
70.00% exactly matched. The variable power payment component
under the Ulu Pandan Agreement is adjustable for fuel cost
Below these limits, operating profits at the Trust level will be movement according to a formula prescribed by PUB. Only
affected, leading to lower cash flows for the year. Based on 60.8% of the variable power payment component is
management projections, every 1% drop in available adjustable for fuel price indexation and the fuel price
capacity below the above limits could lower operating profit indexation is a factor of the monthly average 180cST HSFO
by 0.30% to 0.80%, depending on the plant. for the previous 12 months over the actual fuel price as at
the Ulu Pandan commencement date. If the actual cost of
Assets are illiquid. Utility assets are generally regulated by fuel is higher than the fixed fuel cost used in the calculation,
governments, and it may not be easy to invest in or divest the variable power payment component will not be
such assets, without permission from respective statutory sufficient to cover the actual power costs incurred by Ulu
bodies. The lack of control could affect the valuations Pandan Plant and Ulu Pandan Trust will have to bear the
obtained for such assets as well. extra costs of fuel incurred.

No historical financial information. The management has


been granted a waiver by the SGX from the requirement to

Page 12
Company Focus
K-Green Trust

Distribution Guidance

Trustee Manager likely to pay out 100% of cash flows. KGT Details of DPU guidance
will make distributions on a semi-annual basis to unithoilders, Period Guidance (Scts)
within 90 days after the end of each distribution period. The
Trustee-manager has provided guidance for DPU up to end- From listing date to 31 Dec 2010 3.91
FY11, assuming 100% of forecast residual cash flows are For the first half of 2011 3.13
paid out, details of which are posted alongside. The stated For the first half of 2011 4.69
policy is to pay at least 90% of cash flows. Source: Company

Forecast Distribution Summary

FY N/A (S$ m) 2010F 2011F

Net Profit 7.1 13.6


Add: non cash tax 0.0 0.0
Add Depreciation & Amortisation 0.2 0.3
Less: Recurring Capex 0.0 0.0
Add lease receivables 18.5 36.5
Net Cash Earnings for Distribution 25.8 50.4
Cash Distributions Paid (25.0) (50.0)
Div Payout Ratio (%) 97% 99%

Source: Company, DBS Vickers


Note: Figures for 2010 represent the period from listing date to 31st Dec 2010 (approximately half-year)

Revenue breakdown by assets – Company Projections

FY N/A 2010F 2011F

Revenues (S$ m)
Senoko Plant 17 34
Tuas Plant 11 21
Ulu Pandan Plant 7 13
Construction 32 16

Total 67 84

O&M Income 25 50
Senoko 13 25
Tuas 7 14
Ulu Pandan 6 10

Finance Income 9 18
Senoko 5 9
Tuas 4 7
Ulu Pandan 1 2

Construction revenue 32 16

Total reported revenue 67 84

Tariff revenue 53 105


O&M income 25 50
Finance Income 9 18
Financial Receivables 19 36

Source: Company, DBS Vickers


Note: Figures for 2010 represent the period from listing date to 31st Dec 2010 (approximately half-year)

Page 13
Company Focus
K-Green Trust

Financials – Income Statement Topline includes construction revenue and is hence,


No historical financial statements. For the Senoko plant, misleading. The Senoko trustee will have to complete the flue
accounting treatment before and after acqusition by KGT (in gas upgrading works at Senoko plant, through Keppel
Aug 2009) is very different and hence, financials would be Seghers as EPC contractor , in FY10-11, and this would
misleading. For the Tuas plant, it commenced operations only distort topline by about S$32m in FY10 and S$16m in FY11,
in end-October 2009 and thus, was operational for only two owing to the associated accounting treatment for concession
months in FY09. Thus, despite the availability of financial assets. The constrcution revenue will be matched by a similar
records for Ulu Pandan Plant, the Trustee Manager has construction expense, and hence, would not affect operating
chosen not to disclose historical financials since they would profits, which are likely to remain largely stable on a
not be comparable with future projections. sequential basis.

Sales Trend Operating Cost Trend Profitability Trend


S$ m
100 30.0% 100 20 96%
90 90 18 95%
80 28.0% 80 16 94%
70 70 14 93%
60 26.0% 60 12 92%
50
50 10 91%
40
40 24.0% 8 90%
30
30 6 89%
20
20 22.0% 10 4 88%
10 0 2 87%
0 20.0% 2010A 2011F 0 86%
2010A 2011F 2010A 2011F
Cost of Goods Sold (-) Other Operating Expenses (-)
Total Revenue Revenue Growth (%) (YoY) Net Profit (After-extraordinaries) Net Profit Growth (%) (YoY)

FY N/A (S$ m) 2010F 2011F

Turnover 67 84
Cost of Goods Sold (56) (64)
Gross Profit 11 20
Other Opg (Exp)/Inc (3) (6)
Operating Profit 7 14
Other Non Opg (Exp)/Inc 0 0
Associates & JV Inc 0 0
Net Interest (Exp)/Inc 0 0
Exceptional Gain/(Loss) 0 0
Pre-tax Profit 7 14
Tax 0 (1)
Minority Interest 0 0
Preference Dividend 0 0
Net Profit 7 14
Net profit before Except. 7 14
EBITDA 15 29.6

Sales Gth (%) N/A 25.7


EBITDA Gth (%) N/A 97.7
Operating Profit Gth (%) N/A 91.7
Net Profit Gth (%) N/A 90.8
Effective Tax Rate (%) 4.3 4.8

Source: Company projections


Note: Figures for 2010 represent the period from listing date to 31st Dec 2010 (approximately half-year)

Page 14
Company Focus
K-Green Trust

Financials – Balance Sheet debt-free balance sheet in raising debt to fund future
Zero debt at the Trust and Group level. After the acquisitions.
restructuring exercise involving the three sub-trusts, there will
be no external borrowings at the asset level, as existing Fixed assets take the form of financial assets. Given the
project debts between the sub-trusts and Keppel Group will accounting norms for concession assets, the plants will be
be replaced by equity injections from the Sponsor by way of classified on the balance sheet as financial receivables and
shreholder loans. Thus, the Trust will be free to leverage its not as property, plant and equipment.

FY N/A (S$ m) 2010F 2011F

Net Fixed Assets 0.9 1


Invts in Assocs & JVs 0 0
Other LT Assets 553 532
Cash & ST Invts 70 55
Inventory 14 14
Debtors 18 18
Other Current Assets 55 55
Total Assets 710 674

ST Debt 0 0
Other Current Liab 15 15
LT Debt 0 0
Other LT Liabilities 0 0
Shareholder’s Equity 696 659
Minority Interests 0 0
Total Cap. & Liab. 710 674

Leverage Analysis (x)


Net Interest Cover nm nm
EBITDA Gross Interest Cover nm nm
Total Debt to EBITDA 0.0 0.0
Total Debt to Total Assets 0.0 0.0
Total Debt to Capital N/A N/A
Net Debt to Equity CASH CASH
Net Debt to Equity ex MI nm nm
Capex to Debt nm nm

Liquidity Analysis (x)


Cash Ratio 4.7 3.7
Current Ratio 10.6 9.5
Quick Ratio 5.9 4.9
Source: DBS Vickers estimates

Page 15
Company Focus
K-Green Trust

Financials – Cash Flow Capex of around S$50m in FY10-11. This will be required to
Operating cash flow will support distributions. Healthy and perform the flue gas upgrade at Senoko plant, and will be
predicatble operating cash flows from the initial portfolio of 3 funded from internal cash, arising from the initial proceeds
assets should support the projected DPU payouts over FY10- and existing cash assets.
11.

Cash Flow Trend Free Cash Flow Per Share Free Cash Flow As At Year End
0.09
635
0.07 35
435
30
235 0.05
35 25

-165 0.03 20
-365 15
0.01
-565 10
-765 (0.01)
5
2010A 2011F 2010A 2011F
Free Cash Flow Per Share 0
CF from Op CF from Invt CF from Fin Free Operating Cash Flow Per Share 2007 2008 2009 2010A 2011F

FY N/A (S$ m) 2010F 2011F

Pre-Tax Profit 7 14
Dep. & Amort. 0 0
Tax Paid 0 0
Assoc. & JV Inc/(loss) 0 0
Chg in Wkg.Cap. 0 0
Other Operating CF 19 36
Net Operating CF 26 51

Capital Exp.(net) (32) (16)


Other Invts.(net) (663) 0
Invts in Assoc. & JV 0 0
Div from Assoc & JV 0 0
Other Investing CF 0 0
Net Investing CF (695) (16)

Div Paid (25) (50)


Chg in Gross Debt 0 0
Capital Issues 713 0
Other Financing CF 0 0
Net Financing CF 688 (50)
Net Cashflow 19 (15)
Opg CFPS (S cts) 4.1 7.9
Free CFPS (S cts) (0.9) 5.5
Source: Company projections
Note: Figures for 2010 represent the period from listing date to 31st Dec 2010 (approximately half-year)

Page 16
Company Focus
K-Green Trust

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10 to +15% total return over the next 12 months for small caps, -10 to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson
(www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg
(DBSR GO). For access, please contact your DBSV salesperson.

GENERAL DISCLOSURE/DISCLAIMER
This document is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers
Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH").
[This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any
form by any means or (ii) redistributed without the prior written consent of DBSVR.]

The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as
to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for
general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial
situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken
in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVR accepts no liability
whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this
document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-
owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to
time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or
employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform
broking, investment banking and other banking services for these companies.

The assumptions for commodities in this report are for the purpose of forecasting earnings of the companies mentioned herein. They are
not to be construed as recommendations to trade in the physical commodities or in futures contracts relating to the commodities
mentioned in this report.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction
as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification
on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

ANALYST CERTIFICATION
The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of
his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of
25 Jun 2010, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the
securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions).

COMPANY-SPECIFIC / REGULATORY DISCLOSURES


1. DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the mentioned
company as of 23 Jun 2010.
2. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered
broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the mentioned
company as of 25 Jun 2010..
3. Compensation for investment banking services:
i. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA received compensation, within the past 12 months,
and within the next 3 months may receive or intends to seek compensation for investment banking services from
Cityspring.
ii. DBSVUSA does not have its own investment banking or research department, nor has it participated in any
investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to
obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in
any security discussed in this document should contact DBSVUSA exclusively.

Page 17
Company Focus
K-Green Trust

RESTRICTIONS ON DISTRIBUTION
General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or
resident of or located in any locality, state, country or other jurisdiction where such distribution, publication,
availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to
hold an Australian financial services licence under the Corporation Act 2001 [“CA] in respect of financial services
provided to the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [“MAS”]
under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for
“wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and
regulated by the Hong Kong Securities and Futures Commission.

Singapore This report is being distributed in Singapore by DBSVR, which holds a Financial Adviser’s licence and is regulated
by the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No.
198600294G), which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research
report produced by a foreign DBS Vickers entity, analyst or affiliate is distributed in Singapore only to
“Institutional Investors”, “Expert Investors” or “Accredited Investors” as defined in the Securities and Futures
Act, Chap. 289 of Singapore. Any distribution of research reports published by a foreign-related corporation of
DBSVR/DBSVS to “Accredited Investors” is provided pursuant to the approval by MAS of research distribution
arrangements under Paragraph 11 of the First Schedule to the FAA.

United Kingdom This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the
meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research
distributed in the UK is intended only for institutional clients.

rd
Dubai/ This report is being distributed in Dubai/United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3 Floor,
United Arab Emirates Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for clients who meet the
DFSA regulatory criteria to be a Professional Client. It should not be relied upon by or distributed to Retail
Clients. DBS Bank Ltd, Dubai is regulated by the Dubai Financial Services Authority.

United States Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person
except in compliance with any applicable U.S. laws and regulations.

Other jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for
qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such
jurisdictions.

DBS Vickers Research (Singapore) Pte Ltd – 8 Cross Street, #02-01 PWC Building, Singapore 048424
Tel. 65-6533 9688, Fax: 65-6226 8048
Company Regn. No. 198600295W

Page 18