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CitySpring: A Proxy To Your Utility Bill
Corporate Digest | 15 July 2014
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By: Shane Goh
Articles (99) Profile

Each time we turn on the stove or the tap, we expect gas to come on or water to run. And every month, we receive a bill from SP Services detailing our utilities usage.

But did you know that a company exists in Singapore that offers you exposure to this recurring stream of income?

Temasek-linked Infrastructure Vehicle
CitySpring Infrastructure Trust (CitySpring) is a business trust listed on the Singapore Exchange (SGX) with a market capitalisation of $751.9 million as of 14 July, 2014.

Temasek Holdings is the sponsor and largest shareholder (37.4 percent) of CitySpring. It’s a key platform for the former’s infrastructure investments.

Geographically, the trust’s primarily focused in Asia, Middle East, Australia and New Zealand. Sector-wise, CitySpring looks to invest in utilities, transportation/logistics and communications assets.

The trust is managed by CitySpring Infrastructure Management.

In a recent interview with Shares Investment, Tong Yew Heng, the chief executive officer of CitySpring Infrastructure Management shared with us the investment mandate the trustee-manager has when looking for an asset.

Three-Pronged Approach
CitySpring invests in businesses with long-term, regular and predictable cash flow. Where possible, it would also like to have significant control and influence over the running of the asset.

Presently, the trust has four business units: City Gas, SingSpring, Basslink and CityNet. These units cover the gas, water, electricity and communications segments.

Apart from its 70 percent stake in SingSpring, CitySpring fully owns the other three companies. SGX-listed Hyflux holds the remaining 30 percent interest in SingSpring.

City Gas is the sole producer and retailer of town gas in Singapore that reaches 690,000 customers. It is used mainly by households for cooking and water heating.

SingSpring provides water to the Public Utilities Board, Singapore’s national water agency. Its desalination plant in Tuas is capable of meeting a-tenth of Singapore’s current water needs.

SingSpring's Desalination Plant. Source: Company

Basslink owns a subsea electricity transmission cable, connecting the states of Victoria and Tasmania in Australia. It also owns Basslink Telecoms, the only alternative wholesale provider of telecoms connectivity between Tasmania and mainland Australia.

CityNet is the trustee-manager of NetLink Trust. The latter owns telecommunications infrastructure assets transferred, from Singapore Telecommunications (SingTel), including exchange buildings, ducts, fibres and manholes.

A New Income Stream
On 30 June, 2014, CitySpring entered into a joint venture, with Shimizu Corporation, for the proposed development and leasing of a five-storey data centre building in Singapore.

Located at 2 Marsiling Lane, the building will be leased out to 1-Net Singapore, a subsidiary of MediaCorp. This transaction will be CitySpring’s first green-field project.

Artist's Impression Of Upcoming Data Centre. Source: Company

Based on information from BroadGroup, an international consulting firm, the compound annual growth rate of data centre space is forecasted to be 8.5 percent in Singapore and 11.7 percent in the Asia-Pacific region from 2012 to 2015.

Tong shared that the trust has identified telecommunications infrastructure as a key sector of growth and aims to beef up the assets under this segment.

A Recurring Utility Proxy
Speaking about its existing businesses, Tong noted that CitySpring is able to derive relatively stable cash flow from its assets as their revenues are regulated or contracted long-term with government or state-owned bodies.

City Gas and SingSpring are under the supervision of the Energy Market Authority and the Public Utilities Board while Basslink is under a 25-year contract till 2031, with potential extension options.

Additionally, CityNet receives an annual management fee of $4.1 million. This means that CitySpring’s revenue is almost guaranteed with a low counterparty risk in the form of governments or strong corporate entities (eg. SingTel).

Rising Top Line
This translates into a commendable financial statement. Over the past five years, CitySpring has enjoyed a 7.6 percent compound annual growth rate in revenue from $388.1 million to $521.1 million.

However, a corresponding increase in fuel, electricity and gas transportation costs, which are reflected in the tariff that City Gas charges, has placed a lid on the trust’s growth path as earnings-before-interest-tax-depreciation-and-amortisation (EBITDA) has been stagnant over the same period.

In FY14, CitySpring’s EBITDA was $117.6 million, compared to $120.8 million in FY10. This led to a similar story in its cash earnings, a figure used to measure the trust’s income prior to its distribution, which came in at $60 million in FY14, versus $57.9 million in FY10.

Coupled with a rights issue during FY12, which saw CitySpring’s number of units rise from 979.9 million to 1,518.9 million, the trust’s distribution per unit (DPU) has fallen from $0.049 in FY10 to $0.0328 in FY14.

On the balance sheet front, CitySpring’s cash balance has more than doubled from $133 million to $304.3 million over the same time period. Instead of increasing its DPU, Tong shared that the trust is keen on exploring acquisition and expansion possibilities into income-accretive businesses.

    Investment Merits

  • In the business of basic necessities used on a daily basis (water, gas, electricity, telecommunications)
  • Stable cash flow agreements with counterparties
  • Huge cash balance

    Investment Risks

  • Lack of growth opportunities as utility firms tend to be closely held by the country’s government
  • Absent of high growth mechanisms

SI Research Takeaway
As an investor, businesses which have a recurring income nature offer stability and assurance into one’s portfolio. Utilities would rank among one of the top few industries with such qualities.

While CitySpring may not offer substantial capital gains and has low trading liquidity, with an average daily trading volume of 447,631 shares over the past three months (based on Yahoo Finance), the trust gives out quarterly dividends. Based on the last traded price of $0.495 on 14 July, 2014, it offers a dividend yield of 6.6 percent per annum.

Although this might not be an exciting business, it would be attractive to someone seeking a stock in an essential business that provides consistent income.

Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

Please click here for more information about this author.

Keppel Infrastructure Trust  0.550 -- --   
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