KIT’s initial investment for the 46.7% stake is US$90.3 million ($122.2 million), comprising a “subscription consideration” and a ticking fee.
Based on a shareholders’ agreement, KIT, KIF and the co-investor will provide further equity commitment based on their pro rata stakes. This equity will be deployed within three years. KIT’s share of the equity commitment is US$52.5 million. Hence, KIT’s total outlay for GMG is US$143.1 million.
The acquisition’s fund from operations (FFO) is 3.6% of KIT’s FFO in FY2024 and its value is 7.5% of KIT’s market capitalisation.
Based on the KIT’s group audited financial statements for FY2024, the latest audited net tangible assets (NTA) of KIT was $277.7 million as at Dec 31. The total investment amount, including KIT’s equity commitment, exceeds 5% of KIT’s audited NTA.
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Hence, the acquisition is subject to the approval of unitholders at an EGM to be convened. However, Keppel and its subsidiaries, such as Keppel Infrastructure Holdings, cannot vote.
Based on GMG’s unaudited management accounts for FY2024 ended December 31, 2024, the company’s book value attributed to KIT’s subscription shares was negative US$7.8 million, and the NTA attributed to KIT’s subscription shares was negative US$8.9 million.
GMG’s FY2024 net profit attributable to KIT’s stake is around US$1.4 million. According to KIT’s statement, the negative book value and NTA were due to accrued interest of approximately US$8.4 million for a shareholder loan of $86.6 million.
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Since the shareholder loan has been repaid and GMG has an interest-free loan from its new investors, the loss-making non-core business segments are no longer part of GMG’s operations. Assuming that the vendor shareholder loan interest had been waived, the pro forma book value for KIT’s subscription shares would be US$0.6 million, and the NTA would be negative US$0.5 million as at end-December 2024.
Nonetheless, despite the negative NTA, according to KIT’s announcement, the acquisition is “highly accretive with FY2024 pro forma DPU to increase by 3.5%”.
New direction for Keppel
GMG is a major subsea cable maintenance service provider responsible for 31% of global maintained cable length.
Keppel has expanded into undersea cables, as evidenced by its investment in the Bifrost pan-Pacific Ocean cable. In addition, as Singapore moves into a low-carbon environment, one way to access renewable power from Southeast Asia and Australia is by way of undersea cables. Negative net asset value (NAV) and NTA notwithstanding, GMG provides a further footstep by the Keppel group into the subsea value chain. It operates a fleet of six specialised vessels providing maintenance and installation services for subsea cable infrastructure, which are essential for global telecommunication and data transfer.
Only 54 vessels globally provide such services. In the subsea cable industry, GMG maintains approximately 31% of the global maintained subsea cable length and has installed approximately 20% of the global cumulative installed subsea cable length.
GMG comprises five business units: cable maintenance through a fixed annual standby fee and recurring repair revenue for long-term contracts; vessel charter; turnkey installation of regional and short-haul cable projects; and repair services for subsea cables.
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“GMG’s business is underpinned by highly predictable cash flows, with 80% of FY2024 revenue backed by long-term maintenance and charter contracts served by a fleet of six purpose-built vessels with specialised equipment,” KIT’s trustee-manager says in the announcement.
Although Keppel had announced it planned to divest of its legacy offshore & marine assets and exit the space in 2021 in its Vision 2030, oil prices have rallied, and oil majors restarted a capital expenditure cycle for the exploration and production of offshore oil and gas, as evidenced by Seatrium’s billion-dollar projects from Petrobras. No surprise, then, that Keppel and its affiliates would at some point re-enter the offshore and marine sector, albeit in a different segment. At any rate, although GMG owns a fleet of offshore vessels, they are involved in either laying subsea cables or maintaining them and Keppel is no longer involved in building rigs.
On a pro forma basis, had the acquisition been completed last year, KIT’s FY2024 funds from operations (FFO) would have been 1.3% higher at $294.6 million; NAV would be unchanged, but net debt to assets would be 1.2 percentage points higher at 41.6% compared with 40.4% as of end-December 2024.
OCBC Investment Research has reiterated a buy call on KIT with a target of 50 cents. Much of the report echoes the KIT announcement.
Negative report on KIT
Corporate Monitor, led by corporate governance doyen Mak Yuen Teen, has issued a more analytical report on KIT compared to OCBC. In sum, Corporate Monitor believes that the decline in organic performance raises questions about past acquisitions made by KIT.
Indeed, KIT’s unit price performance has provided negative returns in the past three years, with returns of 0.54% or 0.18% on a three-year CAGR. On a five-year basis, returns are better, with prices up 2.79% or 0.55% on a five-year CAGR and 55.77%, equivalent to a 9.26% CAGR with dividends reinvested
The most important point Corporate Monitor takes issue with is KIT’s change of fee structure first proposed in March 2022, which caused fees to rise (see table). In all fairness to KIT, when its trustee-manager proposed a change in the fee structure, the resolutions had to be approved in an EGM where the sponsor could not vote. Unitholders overwhelmingly voted in favour of the fee change.
For its part, KIT’s trustee-manager and sponsor are not the only managers and sponsors focused on increasing fees. Every fund manager is focused on fees, including managers of REITs who have a fiduciary duty to ensure that unitholders’ interests take precedence over sponsors’ interests should a conflict arise. Fees make the world go round.
Corporate Monitor also points out that KIT’s NAV has been falling, from “32.5 cents per unit in FY2016 to only 14.4 cents per unit in FY2024. If goodwill is excluded, NAV per unit is in negative territory since FY2022”.
Kevin Neo, CEO of KIT’s trustee-manager, says: “NAV is not the correct way to value KIT. REITs are allowed to revalue their assets. We are not allowed. For example, Ixom’s ebitda has increased to $200 million, a $70 million increase and we still carry Ixom at historical cost. (Ixom is one of KIT’s assets.) City Energy (formerly City Gas) has seen its ebitda increase from $44 million to $85.5 million and we are still carrying that asset at cost. These are assets that depreciate over time. Our focus is to grow our evergreen assets so that the increase in valuation of our evergreen assets will outweigh depreciation,” Neo explains.
Instead of NAV, he encourages investors to look at FFO, distributable income (DI) and cash flow. “A better metric to measure performance is DI and FFO, which is the cash flow generated by businesses after netting off business maintenance costs. It will not be the same, so FFO is the best metric to reflect our ability to generate cash flow,” Neo says.
DBS Group Research points out that Neo sees FFO as a better metric to judge KIT’s sustainability of distributions than DI because FFO excludes growth capex, which is discretionary.
“Based on the disclosure, KIT generated FY2024 FFO of $282 million, up 10% y-o-y, and this comfortably covers KIT’s annual distribution payout requirements of around $240 million on the current unitholder base,” DBS says.
As an aside, in FY2024, out of intangibles of $1.73 billion, goodwill was $1.26 billion as at Dec 31, 2024. However, goodwill can sit within the balance sheet within financial reporting standards unless it needs to be impaired.
KIT uses lots of perps
As highlighted by The Edge Singapore last year, KIT’s use of perpetual securities is somewhat concerning. Following the issuance of $200 million in perpetual securities last year, KIT’s perpetual securities stood at $800 million as at end-December 2024, compared to $877 million of unitholder funds.
A REIT manager recently argued with The Edge Singapore that perpetual securities should be viewed as equity. This is true. KIT’s FY2024 annual report states that its perpetual securities do not meet the definition for classification as a financial liability under SFRS(I) 1-32 and are “presented within equity”. However, unlike the perps of REITs, KIT’s perps are allowed one step-up if the issuer does not call at the call date. REITs are only allowed a reset (not a step-up) if they don’t call the perpetual security.
For example, the 4.9% $200 million of perpetual securities issued on Aug 2 last year is subject to reset every ten years and a one-time step-up from and including the first reset date of Aug 2, 2034.
On the capital management front, as of Dec 31, 2024, KIT had a net debt of $3 billion versus unitholders funds of $877 million, excluding the perps. Hence, excluding perps, the debt-to-equity would be very high. For REITs and trusts, aggregate leverage and gearing are defined as net debt to assets. On this metric, KIT is at a modest 40.4%, with an interest coverage rate (ICR) of seven times, which is respectable.
Since KIT is a business trust, it does not have to adhere to an aggregate leverage ceiling or minimum ICR floor.
Neo, for his part, is focused on growing returns for KIT’s unitholders. “We are going to take a more active approach at monetising, growing our business and then recycling our capital. The decision that we always make is whether we should continue to own or sell the asset. If we feel someone is offering us a value that is higher than the intrinsic value of the business, we’ll consider a sales decision. There are no sacred cows in our portfolio if someone comes to us with a price that we cannot refuse. We have some good businesses and sometimes we do get inbound inquiries about assets.”
In January, KIT and Metro Pacific Investments Corporation completed the divestment of their 100% stake in Philippine Coastal Storage & Pipeline Corporation to affiliates of I Squared Capital for an aggregate enterprise value of US$460 million. KIT, which owned 50% of the Philippine asset, is likely to have reaped a $21.1 million gain versus the asset’s book value.
