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CitySpring Infrastructure Trust: Worth another look?

Sunday, December 4, 2011



In reply to a reader, Rookie, who asked if I would consider investing in CitySpring Infrastructure Trust now:

Hi Rookie,

CitySpring at 33.5c? With a promised annualised DPU of 3.28c, the expected distribution yield is 9.79%. This annualised DPU is, of course, lower than the 4.2c in the preceding year.

The balance sheet of CitySpring has strengthened after its latest rights issue in September which saw Temasek increasing its share of the Trust substantially (reflecting a lack of confidence in the Trust by investors) from 27.9% to 37.4%.

Borrowings: S$1,324.5m
Total assets: S$2,004.5m
Gearing: 66%.


If we take out the intangibles of S$ 420.8m from total assets, gearing goes to 83.6%.

Yield has improved and gearing has come down somewhat. However, I am concerned that there would be yet another rights issue to further "strengthen its balance sheet". When? I don't know.

Regular readers know that I only like rights issues when they are distribution yield accretive. If they are not, I need some convincing that they would be good for me in some way. Whether I would buy the argument is something else.

So, to ameliorate such a risk, distribution yield has to increase while gearing remains the same before I would consider buying in. After all, I am able to get the same distribution yield or higher from AIMS AMP Capital Industrial REIT, Sabana REIT and even Cambridge Industrial Trust without the same level of gearing. This is purely from the perspective of yield and gearing, of course.

If people like CitySpring Infrastructure Trust's businesses or even its management for some reason and find its current yield and gearing acceptable, it is their call, of course.

See slides here: Presentation 1H FY12

Related post:
CitySpring Infrastructure Trust: Rights issue.

34 comments:

Ray said...

Gone are the days where we just buy into anything Temasek has huge stakes in. Temasek themselves have been making a lot of bad investments these days.

Anonymous said...

Hi AK,

i am uncomfortable with cityspring's debts too. just looking at Basslink which they acquired in July 2007 for a sum of $A1,175M (SG$1500M approx). It was financed 75% with debt raising three bonds, a A$486 floating rate bond due 2015 and two A$190 fixed rate capital indexed bonds due 2017 and 2019 respectively.

how are they going to pay for the bonds when they mature, even if they were to issue rights again?..

i think what they did i.e. acquiring Basslink was a big mistake and did their shareholders a major disservice.

Anonymous said...

Thanks AK.
Didnt expect you to reply so fast.
Indeed, i was looking at its business nature and high yield.
But, as u have pointed out, the possibility of another rights issue is possible.
Rookie.

AK71 said...

Hi Ray,

Christmas is round the corner. Let us be charitable. We are fellow human beings. Ho ho ho... ho ching! ;p

AK71 said...

Hi Anonymous,

I agree with you and this is why I think the Trust has a mediocre manager. I won't say anything about the sponsor.

I suspect another rights issue will be required sooner than later.

AK71 said...

Hi Rookie,

I try my best to run my blog like a business. Timely replies are appreciated more often than not.

Thanks for providing the catalyst for a blog post. ;)

Anonymous said...

Hi AK,

Though they may not do a rights issue in the short term since one was just done recently, looking at its trend i.e. IPO in 2007, rights issue in 2009 and 2011, one could guess when would possibly be the next rights issue.

Drizzt said...

If people are interested in the same risk or same reward but lower risk they should take a look at Miif,China merchant Pacific , sp ausnet,

AK71 said...

Hi Anonymous,

Yes, I remain wary of this business trust and suspect that another rights issue to improve its balance sheet is really just a matter of time.

At the current price, it is still a no go for me.

AK71 said...

Hi Drizzt,

Thanks for the recommendations! :)

After our chat in LP's cbox, I went and bought more MIIF at 48c. It has turned out nicely. You're the man! ;)

Affordable items said...

i would look at K-green instead with the 0 debt gearing. of cos K-green has its cons but if given a choice, i would stay clear of both :P

Ray said...

Hi AK,

What is LP website URL? Would like to drop by. Tks

AK71 said...

Hi Affordable items,

Oh, yes. We must not forget KGT. Haha.. It is definitely lesser of the two evils.

At my entry price in KGT, if they do not do any acquisition at all, I worked out my absolute returns to be a bit more than 1.1% per annum over the remaining lifespans of its assets' concessions. This also assumes that the concessions would not be renewed.

However, I do not believe that KGT would not take advantage of the low interest rate environment to gear up and acquire some assets. All such acquisitions would be DPU accretive and would send distribution yield up.

With zero gearing at the moment, gearing up to 40% could see a significant upward revision if the management should distribute all its income.

The management could also choose to retain such earnings for asset renewal purposes. This would effectively debunk arguments that the trust is a self liquidating vehicle.

A retest of its previous low of 85.5c could see me adding to my long position in KGT. If it should test 84.5c, that would mean a distribution yield of 10%.

See: K-Green Trust: A bad investment?

AK71 said...

Hi Ray,

Go to my left sidebar and look for my blogroll "Investors and Traders". Look for "Bully the Bear".

Welcome to the world of cboxers. :)

Anonymous said...

Looking at another perspective, one positive thing cityspring has is that the bulk of its debts was acquired thru Basslink years ago i.e. fundamentals was already vey bad at the time of Basslink acquisition, yet price was around 40c+

Now that it has raised rights twice to pay off its debts, thus having its fundamentals improved (relatively speaking), its price has fallen to the low 30s.

So those who take a position now (though still risky) could be much better off than those who did so earlier.

Anonymous said...

I'm interested in MIIF too.. but it has risen so much from Mar 09 low.. Perhaps we shouldn't look at it that way, but there is much uncertainty in the Europe crisis. If it implodes, the lows could very well be revisited.

I remembered during the last crisis a fren said capitaland was cheap at 2.50; I agreed but I knew the crisis will cause it to get lower. I later bot capland at 1.70.

AK71 said...

Hi Anonymous,

Would you like to include your name or initials in your next comment? ;)

Yes, for sure, people buying into CitySpring now would be buying into a relatively better proposition than those who bought last year, for example.

It is now less bad. ;)

AK71 said...

Hi Anonymous,

Ah, yes, of course, it could happen that way. No one could be sure. I guess this is where we have to do what we are comfortable with.

Personally, I already have a long position in MIIF. If its price goes up and I don't get to buy more at a lower price, so be it. If it should weaken, I would be glad to buy more. :)

Anonymous said...

Then again, the Europe crisis could be different from the last crisis, as can be seen that world governments have mastered the art of money printing and massive liquidity injections, as seen most recently the provision of cheap USD.

Thus, we could experience volatility as sentiments shift from pessimism to optimism, but the implosion could be postphoned yet again due to global printing presses working overtime. In this case, the Mar lows in 09 may not be revisited, but perhaps only for a time, till the whole system implodes.

In the meantime, there are still many who are pessimistic, but as world governments go on their money printing spree, bailing every bank and institution out, people then get optimisitc and complacent, and will believe that the crisis has been resolved. Perhaps it will be then the time when the whole system implodes.

That will be the time when money printing no longer works.

Free
(Hi AK, my nick, as requested :)

AK71 said...

Hi Free,

Yes, I believe that money printing might not work very well for much longer.

In the last crisis, credit froze and money printing was necessary to restore confidence. This crisis, we have low interest rates and liquidity sloshing. Granted, credit has been freezing up in the eurozone but we still face inflationary pressures in Asia due to excess liquidity.

More money in the global system is going to create a lot more problems for Asia as the eurozone and USA seek to devalue their currencies for obvious reasons. If the Japanese decision to act unilaterally to weaken their currency is anything to go by, we could be on the brink of a currency war. No one can win.

One day, people could lose all confidence and markets could once again slump. However, as Dr. Marc Faber said so well, as long as there is money printing, global stock markets will be supported if only nominally.

What do I know? I do know that if inflation is here to stay, our wealth is being rapidly eroded away if we simply hold on to cash. Hence, my current strategy of being partially invested instead of being 100% in cash.

Drizzt said...

MIIF have ran up to 55 cents from a low of 46 cents.Here is a dbs vickers detail report on it http://www.investmentmoats.com/money-management/high-yield-investing-money-management/a-detail-dbs-vickers-macquarie-international-infrastructure-report-miif/

the safe estimation is instead of asking if 5.5 cents is a good yield, ask whether a conservative 4 cents is good enough on you.Thats a 7.2% yield

AK71 said...

Hi Drizzt,

Thanks for sharing the link. :)

Serendib said...

Hi AK, I think it's a stretch to say that liquidity is sloshing at the moment, especially when it comes to USD. Fortunately our banks seem to have it, but euro, m'sian, Chinese and Indian banks are badly short of USD

SnOOpy168 said...

"I am concerned that there would be yet another rights issue to further "strengthen its balance sheet""

This counter has been one of my worse mistake ever. Lesson learned and still learning.

I still don't like the idea that with a monopoly, they can still screw up.

AK71 said...

Hi Serendib,

Perhaps less so now due to the tightening measures taken by the Indian and Chinese governments this year too. I have not been following what the Malaysians are doing.

However, the Chinese are loosening money supply again as its economy and especially manufacturing and property sectors show signs of rapid deceleration.

With inflation still untamed, the current amount of liquidity in the system still needs mopping up. With interest rates still low, inflation is likely to worsen.

In Singapore, with hot money still flooding our system due to confidence in our country and currency, interest rates will very likely remain low. Weakening the S$ will address this but it will not do anything to lower inflation.

This is a delicate situation we are in. It is definitely beyond me. I can only wait and see how things will unfold.

AK71 said...

Hi SnOOpy168,

I am not so sure it is a monopoly. It can be considered an important player perhaps. :)

Bad decisions made by a monopoly are not a big deal because it could just pass the costs on to its customers who would end up paying for its mistakes. ;p

Mark said...

Hi AK
Is hyflux stil good today? it pull bac to 1.20 again.. yr opinion plz?

AK71 said...

Hi Mark

Er... I am vested at the same price. So, I am not adding. If I were not vested, I might initiate a long position based on the TA I did.

serendib said...

Hi AK,
ref liquidity - I thought you'd find this article insightful. And yes, it is that bad out there in the banking market!
http://www.bloomberg.com/news/2011-12-05/credit-squeeze-hits-asia-trade-finance-as-adb-loan-demand-soars.html

AK71 said...

Hi serendib,

Hey, thanks for the link. Much appreciated. :)

Could help to put the brakes on inflation here in Asia, perhaps.

Anonymous said...

I take what Faber says with more than a pinch of salt (though what he says about world govts printing their way out of the crisis is sensible).

Faber is one of the finest prata flipper; he has also been wrong many times.

See what he said in 2008:

GENEVA, Oct. 28 (Xinhua) -- The world financial market will stay at low levels for a long time to come, and government injection of capitals into the market will not help, Swiss financial guru Marc Faber said on Tuesday.
"We'll stick at this low point for a long time. Anyone who thinks that everything will soon be rosy again is naive," Faber, known as Dr. Doom for his prophecy of earlier economic crises, told the Swissinfo news website in an interview.
According to the investment adviser, no single catalyst could lead to a new bull market in the world.
He said government injection of huge capitals into the market could not actually save the market. To the contrary, those state measures can cause massive budget deficits.

http://news.xinhuanet.com/english/2008-10/29/content_10270260.htm

Free

AK71 said...

Hi Free,

Yes, no one can be right all the time. Warren Buffet has been wrong before too. I won't call Marc a prata flipper just because he is pragmatic and changes his calls according to the circumstances. :)

In essence, I agree with Marc that printing money will not solve the problems faced by the occidental economies. It is just kicking the can down the road.

Of course, I am just a retail investor. I can only wait and see how things will pan out. ;)

Anonymous said...

Hi AK,

Faber was not being pragmatic, changing his calls due to changing circumstances.

The basis of his view that "world financial market will stay at low levels for a long time to come" was that "government injection of capitals into the market will not help".

He later changed his tune and declared the Dow will go up. What is his basis for this? It is the same basis i.e. ""government injection of capitals into the market".

If you have taken note of his calls, you will know that he frequently flip flop.

Several analysts, including Edward Harrison, founder of Credit Writedowns, had noted this as well.

Free

AK71 said...

Hi Free,

It seems that you are pretty sure about this.

For me, at least, Marc has been right in all those instances when I did take note of what he had to say.

However, since I cannot say that I have been tracking Marc's views diligently through the years, I make a poor candidate to discuss his alleged lack of consistency or even integrity. So, I will have to abstain from commenting on this further. :)

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