Tuesday, December 7, 2010

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.


  1. whats the difference between what they replied you and mine? http://www.investmentmoats.com/money-management/dividend-investing/k-green-trust-with-an-investor-relations-reply-to-falling-nav/

  2. It would seem a very bad idea to invest in this trust. Isnt it like giving an interest free loan to this trust across 15 years which they then pay you back ?

    And all this bearing in mind that inflation is always rising.

    And if the current NAV is 1.15 anyone who buy into this trust above 1.15 is just going to lose out over the longer term.

    Unless the trust can do something about it soon which is unlikely. I doubt the district cooling assets is going to yield much earnings even if they can acquire it.

  3. I always view the Market to be extremely efficient in valuing REITs and business trust. KGT has a strong blue chip sponsor, it is debt-free, it's counterparty is the SG Government and its assets deals with water and power (highly defensive). Hence, honestly, what type of returns would you expect from such an investment ? 2%, 4%, 7% or 10% ? Logically, it would be around 2-4%. So when at first glance, you see the market pricing KGT at 7% yield, you gotta ask why !

    As Momo clearly pointed out in his email, KGT is operating as a self-liquidating trust whereby there is no plans to replenish its depreciating assets when the concession periods are over. Hence the distributions consist of both profits and a return of our own capital over time. This would explain the 'high yield' since over time, the NAV will decrease.

    I may be wrong so I hope KGT's reply to Momo will explain it in greater detail.


    (Not Vested)
    Disclaimer: Not a call to buy or sell. This represents my own views which may be terribly wrong !

  4. Hi Drizzt,

    indeed, it is a standard template answer. Guess many have asked them the same question. :X

  5. Hi Anonymous (Dec 7 10:28pm),

    ceteris paribus, it would be a loan of 2% interest, as pointed out by Nick.

    If you buy below NAV, it would only be marginally higher.

    I hope it works out well with the plans in place.

  6. Hi Nick,

    logically, as a business trust on defensive infrastructure assets, they could secure a loan of probably $1 per share, which would bring their gearing to near 50%. The total income would shoot up.

    As AK pointed out, the key now lies in what assets they are going to acquire, how much they are going to gear up and whether they will raise their distribution or retain the extra to buff up the NAV in the long run. This would be the factor on whether KGT can continue as a going concern after 30 years.

    Of course, if nothing changes for the next 30 years, this is equivalent to securing a cheap loan.

  7. Hi Owner of this blog.

    I'm very impressed by how much you can save in 2 years. Just curious to find out, does it include money that you give to your parents (assuming you do give them).

  8. Hi Heather,

    I saw your comment on the Aztech post. I'm copying over my reply here:

    My savings does not include how much I gave my parents each month. But at the moment, but my parents are still young (early fifties), so there's no hefty medical bills or etc to worry about. They had been prudent in expenditures too, so there's no debt to worry about too.


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