atans1

CitySpring Infrastructure Trust: a TLC dog with fleas

In Infrastructure on 08/12/2010 at 5:21 am

As regular vistors to this blog will know, I’m a sucker for yield and NAV plays. So I was starting to think abt CitySpring Infrastructure Trust which offers a prospective yield of abt 7%. It is also a Temasek-linked trust and could possibly be trading at a discount to NAV.  An investing sweet spot.

Fortunately before I even got to reading up the basic data on the trust, I chanced across a Kim Eng Eng Research report dated 30 November, which called the trust a ” sell”.

To forestall a credit rating downgrade of the three bonds issued by Basslink, CitySpring Infrastructure will set aside A$20 million (S$25.4 million) in an escrow account for this asset before next January. Although this move may resolve the CreditWatch placement by Standard & Poor’s (S&P), a capital structure plan involving an equity cash call seems inevitable in our view. So, while the forward yield of 7.1 per cent based on the previous DPU guidance appears compelling, there is no denying the risk of dilution.

… The bonds, worth a total of A$866 million, face a potential ratings downgrade that will trigger a cash lock-up at Basslink and affect CitySpring’s distribution policy … CitySpring will still need to submit a capital structure plan that will satisfy S&P’s stringent risk assessment. It plans to do so by next September. As one of the options, Basslink’s cash flow may be applied to reduce debt … A capital structure plan involving an equity recapitalisation seems highly possible in our view, given the presence of other debt obligations, such as the $142 million corporate loan due in August 2011 and the $130 million City Gas loan due in 2012. Even if Basslink continues to pay a distribution, unit-holders’ yield may still suffer a dilution.

We cut our DPU forecasts for FY March 2012 and onwards from 4.2 cents to three cents to factor in the removal of Basslink’s contribution. Our TP is lowered to $0.52, reflecting our assumption of a capital injection of $100 million to reduce gearing. Downgrade to ‘sell’.

Looks like the perfect storm. And I’ve found out that it’s last reported NAV is 0.34cents.

But I’ll monitor the trust, waiting for the capital raising exercise which I agree must come. It might then be like AIMAMP industrial reit or Fraser Commercial* — gd yields and discount to NAV to compensate for the overhang of units created by the rights issue. BTW, for waz it’s worth, I read in Monday’s ST that OCBC’s reit analyst and DBS’s  head of asset-backed structured product like industrial and office reits.

Investors in the Mapletree s-reits may want bear in mind that this trust was once a high-flying investment trading way above NAV, and giving gd yields. Until it the managers went walkabout in Oz Outback. Being part of the Temasek stable doesn’t mean that one can “close eyes and buy and hold”.

*office and malls (here and in Oz)

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  1. I have held cityspring since 2008 for its 10% yield then. I am of the view that the temasek card has been overhyped as I see little support to help cityspring grow. Mgt has been telling investors/shareholders that acquisition targets have been asking too much despite the financial crisis, though on hindsight, I suspect financing aspect is the main cause.

    The board should explore sell it to a larger setup, like the way Hyflux water trust did. Its the only way for existing shareholders to exit at a better price.

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