Keppel Green Trust -- an email to IR

At last I have the time to really flip through K-Green's prospectus. I didn't really do it earlier as I was really busy with my students' exams.

Taking a look confirm what most people have been saying all along... KGT might well be distributing it's NAV to it's stakeholders at the moment.

So I sent an email to KGT's IR and asked...

My email:

I'm an investor in K-Green. I refer to the following 3 paragraphs from K-Green's prospectus.


"On the expiry or earlier termination of the Senoko State Land Lease, the Senoko Trustee has to yield up to SLA without charge the demised premises together all buildings, structures and appurtenances thereon in good and tenantable condition and state of repair (fair wear and tear excepted) and in clean and sanitary order and condition and all fixtures in good working condition and satisfactory maintenance (fair wear and tear excepted)."


"On the expiry or earlier termination of the Tuas DBOO Lease Agreements, Tuas DBOO SPC has to yield up to the lessor without charge the demised premises together with all buildings, structures and appurtenances thereon in good and tenantable condition and state of repair and in clean and sanitary order and condition."


"At the expiration, surrender or earlier termination of the Ulu Pandan Lease Agreement, Ulu Pandan SPC yielding up the land to PUB in a good and clean state and condition that complies with all laws at the risk and cost of Ulu Pandan SPC (including undertaking remedial works that are required to yield up the land to PUB to the requisite state and condition)."


Senoko has an agreement for extending it's lease for 15 years. For the purpose of my question, let's assume it is extended successfully.




The following is the amount of concession remaining:
Senoko: 29 years
Ulu Pandan: 17 years
Tuas: 24 years




To my understanding, at the expiry of the leases or concessions, all buildings and lands are returned without charge. Based on this, the terminal value of the NAV should logically tend to zero over a period of 29 years. Am I missing anything here?

The reply:

Thank you for your email.


Your understanding of the concession agreements of the three assets under K-Green Trust (KGT) is correct.


We would like to take this opportunity to assure you that the Trustee-Manager of KGT is focused on providing long-term, regular and predictable distributions to its Unitholders. While the three existing Singapore plants are contributing steady cash flows to the Trust, KGT will also be seeking additional new assets so that the Trust can continue to maintain the level of distributions over the longer term, when the concession agreements of the three plants end.


As stated in the Introductory Document issued on the listing of KGT dated 31 May 2010, Keppel Integrated Engineering, the sponsor of KGT, has granted KGT rights of first refusal to four assets. They are the three district cooling system (DCS) plants under Keppel DHCS Pte Ltd, and a 22% stake in a waste-to-energy plant in Sweden. KGT is looking to acquire the three DCS plants in the near term.

My next reply:

thanks for your reply. I appreciate it.


My main concern lies in the long term NAV of K-Green, whether it could be maintained, or better, increase, over time. The reason for this concern lies again in the concession where the assets are to be returned without charge.


From the 3rd quarter report, EPS is 0.7 cts while FCF per share is about 3 cts. I understand there's an one-off upgrading expense of $4.8mil, or about 0.76cts per share, so the actual EPS would probably be about 1.46 cts.


The projected DPU is 3.91 cts. While it is below the FCF per share if we extrapolate it to half a year, it is greater than the EPS. Would this reduce the NAV in the long run?


I understand too that KGT is seeking to acquire new assets by leveraging on its zero gearing. By leveraging, I would presume it's taking on debts. This would increase the gearing, but does not enhance the NAV. However, this does increase the profits of KGT and hence the EPS. Let's assume again that KGT has acquired the new assets. I would like to ask if KGT plans to retain most of this additional income instead of distributing it in order to build and buff its NAV over time, assuming that the new EPS becomes greater than 3.91 cts?

At the moment, there's still no reply on the 2nd email. Granted, I made an error (as pointed out by Nick) that the one-off upgrading expense has already been factored in, and removing it will not add to the EPU.

The main concern as pointed out by many is that KGT's NAV appear to be self-liquidating; they have a fixed asset lifespan, yet they did not retain any cash for depreciation of their assets.

The only way it could work out is when KGT purchased its new assets, and ensures it's EPU is greater than it's DPU. However, whether that would happen is unknown. The only consolation is that it is at 0% gearing, which sort of assures me that the problems happening with CitySpring would likely not beset KGT in the foreseeable future.

At my average price of $1.11, I hope I won't get to regret it in time to come.