Keppel Infrastructure Trust (A7RU) Earnings Call Transcript

Good morning, everyone. Welcome to the KIT First Half 2026 Results Audio Webcast. I'm Marilyn from the IR and Sustainability team. Joining me today from the KIT management team, CEO, Mr. Kevin Neo; CFO; Mr. Raymond Bay; and Director of Portfolio Management, Mr. Tan Jun. They will cover KIT's first half 2026 highlights and business strategy, followed by business performance across the portfolio and close with capital and balance sheet. Please leave your questions for the Q&A session at the end of the presentation. For analysts who are joining us on the MS Teams platform, please check that you're on mute throughout the presentation. For those joining us online via the webcast platform, please type your questions via the chat box. I will now hand the time over to Kevin for the presentation. Kevin, please?

Thanks, Marilyn, and good morning, everyone, and thanks for joining us today. As the largest SGX-listed infrastructure business trust for enterprise value. We own and manage a portfolio of essential infrastructure assets across energy transition, environmental services, distribution and storage and digital infrastructure, valued at approximately SGD 9.4 billion, as at 30 June, 2026. To date, we achieved total returns of circa 13%. Over the past decade, KIT had delivered total returns of 136%, demonstrating our ability to create value across market cycles, underpinned by a strong track record of over 19 years of infrastructure investment and management. KIT's key achievement during the first half include the following: first, DI before divestment gains increased by 1.2% year-on-year to SGD 101.1 million, despite the fuel cost under recovery for City Energy. We are declaring a 1H 2026 DPU of SGD 1.99 cents per unit, maintaining our commitment to deliver sustainable distribution to unitholders. Second, we continue to execute on our capital recycling strategy. To date, approximately 80% of the net proceeds from divestments had redeployed into 2 accretive acquisitions, namely the acquisition of a 46.7% stake in GMG and the follow-on acquisition of KMC, which increases our stake in KMC to 90%. Third, capital management remains a key strength. We have successfully secured 100% of FY 2026 refinancing requirements ahead of maturity. Interest coverage ratio has improved to 8.3x, reflecting the strength of our cash flows and disciplined financing approach. Finally, we are heartened that the positive unit price performance and the consequent total returns of over 13% in the first half of the year, reflects continuing investor confidence in our strategy, portfolio quality and execution capabilities with ongoing Middle East conflict, direct exposure is limited. And more importantly, we have not experienced operational disruptions across our assets. For AGPC, there's been no disruption to gas supply or operations. Across the portfolio, most businesses operate under long-term contracts and benefit from cost pass-through mechanism. While higher fuel and energy prices may create temporary under recoveries, particularly for City Energy, these effects are generally recoverable over time. At this stage, we remain comfortable with the resilience of portfolio cash flows and continue to monitor developments closely for any second order effects. Our investment strategy remains focused on sectors, supported by strong structural tailwinds of energy transition, rapid urbanization and digitalization. These themes are expected to require significant long-term capital investments and create attractive opportunities for KIT. Our focus is on owning essential infrastructure assets and businesses with good cash flows in developed markets, where regulatory frameworks are stable and predictable. Combined with Keppel's operating capabilities and ecosystem, this provides a strong foundation for sustainable growth. We apply a disciplined investment framework when evaluating opportunities. Our focus is on assets that provide essential products or services, generate stable and growing cash flows, offer attractive risk-adjusted returns, our DPU accretive, possess high barriers to entry and have either evergreen characteristics or long asset lives. This framework of acquisition and asset management decisions and directly supports our goal of delivering sustainable distributions and total returns. Next, a key feature of KIT's strategy since 2019 has been active portfolio management. Through disciplined acquisitions and capital recycling, we have constantly replaced earnings from maturing concession assets. With earnings from businesses that offer stronger growth prospects into the long term. As a result, portfolio DI has grown at an 8.5% since 2018. In FY '25, approximately 51% of distributable income was generated by evergreen assets, as compared to 29% in FY 2018. This strengthens the sustainability and quality of our earnings base. Beyond acquisitions, active asset management remains a significant source of value creation, across businesses such as City Energy, IXOM, Ventura. Management teams look to deliver continued EBITDA growth through initiatives, including new revenue streams, bolt-on acquisitions, productivity improvements, technology adoption, including AI, organizational optimization and cost management initiatives. This focus on operational excellence enhances cash flow and supports long-term value creation for unitholders. Looking ahead, our priorities remain unchanged. Our objective remains on achieving sustainable DPU growth and higher total returns for unitholders. First, continued disciplined investment and capital recycling, focusing on assets aligned with our target growth segments. Second, drive operational excellence and pursue margin improvement opportunities through cost optimization and revenue enhancement for our evergreen businesses. Third, maintain active capital management to support stable distributions and future growth. We have already deployed approximately 80% of divestment proceeds, and we'll continue to evaluate opportunities for the remaining capital. Lastly, these key priorities position us well to navigate near term uncertainties, while staying focused on our objectives to deliver long-term value to unitholders. I think with that, I'll hand over to Jun Da for 1H 2026 business updates to the KIT portfolio.

Thanks, Kevin. I'll take you through the KIT portfolio business updates in the next few slides, City Energy delivered stable operating performance during the first half. Gas consumption remained stable, supported by continued adoption of residential gas water heaters, which helped offset softer visitor arrival trends. While the Middle East conflict resulted in fuel cost under recovery during the second quarter, active management actions and cost optimization measures helped contain the impact. Looking ahead, management will continue to actively manage fuel cost recovery, while staying focused on pursuing growth opportunities and strengthening performance. Moving on to IXOM. The company continued to demonstrate resilience and operational strength in the first half. Core Chloralkali and Traded businesses performed well, supported by healthy customer demand. The team's multi-supplier strategy allowed it to navigate supply chain disruptions arising from geopolitical developments with minimal impact. Management remains focused on driving synergy benefits from recent acquisition, improving productivity and optimizing the portfolio through rationalization of noncore operations. Moving on to Ventura, the company delivered another strong operational performance during the period. For the MBSC business, service reliability remained at 100%, while on-time performance exceeded 90%. Meanwhile, revenue within the government contracted business continues to benefit from contract indexation and network expansion. For the non-MBSC business, Ventura completed acquisition of Crown Coaches in July 2026. This supports the strategy of growing the non-MBSC segment through both organic and inorganic initiatives. On EMK, the company continues to execute its strategy of enhancing profitability, while expanding its innovation capacity. For landfill, pricing remains flat from first quarter and management has maintained pricing discipline to preserve long-term value of the business. In incineration, management continues to focus on improving incineration pricing mix and efficiency. Looking ahead, Phase 1 of the incineration expansion has commenced and is expected to complete by the end of 2026, creating an additional growth driver for the business. Lastly, on GMG, the company continues to perform in line with expectations, following our investment. The fleet remained fully utilized throughout the period, supported by long-term maintenance and charter contracts that underpin recurring cash flows. Management is also progressing with vessel expansion plans to support future growth. Across our remaining portfolio assets, performance remains stable. KMC achieved 100% contractual availability and following our recent acquisition, KIT now owns 90% of the asset. All contractual obligations with the regulators were met for the Singapore Waste & Water Assets and management continues to pursue potential opportunities for concession extensions. AGPC continues to operate normally with no supply or operational disruption within renewables. BKR2 benefited from stronger wind conditions, driving significantly higher generation compared to the prior year. Overall, these assets continue to provide diversified and resilient cash flows, that support distributions. I will now hand the presentation to Raymond for the financial and capital management of KIT.

Thank you, Jun Da. Moving to next page, turning to the financial performance. Total asset FFO increased 14% year-on-year to SGD 200.5 million. The growth was mainly driven by stronger contributions from the energy transition and distribution and storage and the Digital segment. After maintenance CapEx and debt repayments, the total asset DI remained resilient at SGD 147.5 million. At the trust level, distributable income was SGD 101.1 million, net of corporate costs. Excluding last year's divestment gain, distributable income for first half 2026 increased by 1.2% year-on-year, highlighting the resilience of the underlying portfolio. Moving to next page. The consolidated debt for KIT increased slightly to $3.28 billion, as at 30 of June 2026 compared to 31 December 2025. Net gearing increased to 44.2% from 31 December 2025. This is mainly due to reduced cash position, post distribution paid in February and the deployment of capital in the acquisition of an additional 39% stake in KMC. Nonetheless, the net gearing ratio does not reflect the fair value of KIT's asset and remains within our targeted range, providing meaningful acquisition capacity. Interest coverage improved to 8.3x from 7.6x, as at last year. The group's weighted average cost of debt is stable at 4.4% a (sic) [ 4.5% ] with some savings at the trust level, achieved through proactive refinancing and disciplined capital management. The portfolio remains well hedged with approximately 77% of debt hedged and nearly 79% of cash flow distribution hedged. Moving to next slide. We had successfully raised SGD 200 million, 7 years MTN funding earlier this year. And therefore, the funding is secured for the December refinancing need. Together with the available committed facilities of approximately SGD 300 million, this position us well from a liquidity and funding perspective. Our capital management priority of maintaining strong liquidity for financial flexibility remains unchanged. This is done through growing cash flows, optimizing financing costs and disciplined capital recycling. I will now hand the presentation back to Kevin for the closing.

All right. Thanks, Raymond. To conclude, the first half of 2026 demonstrated the resilience of KIT's portfolio and the effectiveness of our disciplined investment and capital management approach. We continue to execute the strategy of delivering sustainable distributions and long-term total returns through disciplined capital allocation, active asset management and prudent capital management. Despite the ongoing conflicts in the Middle East, the portfolio demonstrated resilience, supported by the defensive nature of our assets, long-term contracts and diversified cash flow base. We delivered growth in underlying distributable income, while executing on our capital recycling strategy, redeploying 80% of divestment proceeds into accretive opportunities. That enhances the portfolio's long-term growth profile, all while maintaining balance sheet strength and security of refinancing needs. Looking ahead, we remain focused on disciplined capital allocation, active portfolio management and value creation to deliver sustainable returns for our unitholders. Thank you, and we'll be happy to take questions.

Thank you, Kevin, Jun Da and Raymond. We will now proceed to the Q&A session. [Operator Instructions] May we have the first question, please? Ezien?

I have 2 questions. The first one is on GMG. Just now it was mentioned that this company is expanding their vessels. So, I wanted to know whether there will be any capital cost to KIT, when that happens? And if so, what kind of timing? The second question is Keppel, your sponsor has a number of subsea cables. Wondering whether these cables would fit into KIT's investment mandate? That's all from me.

Yes. So, I think we do see a lot of growth in GMG. I think we mentioned in a couple of calls in our results that we have acquired a secondhand vessel. They are in the process of being repurposed into cable laying vessel, right? And that requires capital from the shareholders, and KIT have funded that using a debt facility. So again, just to be clear, right, GMG has a debt facility at the GMG level, which will be used for funding growth CapEx and so on. To the extent that it requires additional equity from the shareholders, that will be funded by, I think that facility is at a KIT level. So, there should not be any impacts to our operating cash flows and so on. With regards to the submarine cables, I would say that submarine cable is a sector or asset class that KIT now we are very interested in. But of course, my sponsor, Keppel, they're doing very well with project Bifrost. I think they may have recently announced some sale of certain fiber pairs and so on. So, these fiber pairs, we do expect them to be sold on an IRU basis, which basically means that the opportunity set for KIT coming is quite limited, right? However, there are other submarine cables out there, that KIT could look to acquire. And I think as a whole, we are quite interested in the digital infrastructure sector. Submarine cable is just one part of the entire value chain. I think we are equally interested in terrestrial networks, mobile towers and so on, yes.

Just one follow-up question on GMG. So, you mentioned that if it requires capital, it will come from the debt facility. For the debt facility at the GMG level, is it recourse to the shareholders?

No, it's not recourse to the shareholders.

Okay. Thank you.

In terms of sequence of funding, we always look to the business to fund itself, right? And I think when we bought the asset or bought the stake in GMG, we did highlight that there's a lot of growth opportunities out there. And to extent that the debt facilities are not -- insufficient. KIT, we're happy to support debt, because there's a lot of good growth out there in the sector.

Thanks, Ezien. Shekhar, your questions, please.

I have 2 questions on City Energy, the first one is on the under recovery. Can I get a sense on when can we expect a full recovery? Will it be in the second half 2026 or does it spill into 2027? The second one is on the SGD 4.5 million property tax refund. Is this a one-off? And if I could understand what should be the clean underlying DI run rate, if I could strip off, let's say, the under recovery in this refund?

Yes, so for Citi Energy, I think from our previous -- and as a quick recap, I think the under recovery and over recovery situation depends on actual commodity prices versus the price at which we set the town gas pricing at the beginning of the period, right? So in fact, at the beginning of the quarter, we expected a larger than expected under recovery. However, I think the company has worked on a couple of initiatives to close the gap. So as you can see in the results, the other recovery has been pretty well managed. And to answer your question on the property tax, it's one of the one-off initiative that I think management has worked on to I think offset some of the impact of the cost recovery. As to when the under recovery can be recovered, I think it is a function of commodity prices going forward, right? So, another situation where commodity prices come down over time, we should be able to see an under recovery over a period of time -- over recovery over a period of time.

So Shekhar, yes, the property tax refund is a one-off. We don't expect that it will recur, right? But I think we have to see the whole thing in the entirely, right? We had experienced a certain amount of under-recovery in Q2, right, which is in a way, almost offset by the property refund. So on a clean state basis, I would like to think that in a way, a wash, right? Then for -- as what Jun Da has mentioned, right, whether we will recover the under recovery in the second half, I think that depends on the oil and natural gas price going forward. I think it really -- it's really hard to predict how it will move, because ultimately, these are commodity pricing. But again, I'll go back to the way how tariff price is being set, right? So in the arrangement with EMA, right, let's say for the tariff -- the reference tariff price cost -- natural gas cost is a pass-through in a way to end consumers through a reference price. And the reference price set at the beginning of this quarter, based on the commodity pricing for the previous quarter, right? And if the previous quarter, the pricing is high, then we will enter the quarter with a high reference price that we will use to charge the customers, right? And if during that quarter itself, natural price comes down, then that's when we will go into an over-recovery position. And because the gas price is high in Q2, we entered -- we are entering or have entered Q3 with a relatively high reference price. But whether we go into an over and under recovery position, depends on the actual price of gas at a point in time. But again, this is -- as we have always emphasized, this is just a very mechanical arrangement of passing through the gas price to end consumers. Whilst we may experience over and under recovery in certain quarters, but we do expect to recover them over a period of time, maybe 2 quarters, 3 quarters, thereabouts and so on. So hopefully, this gives you a bit of guidance on the outlook on the over and under recovery.

Okay. Thank you, Kevin. Just a quick follow-up. So how should I look at second half DI for City Energy? I mean you said this property tax refund is a one-off. What else can management do to manage the under recovery?

So -- well I think it's hard to predict whether we go into over and under recovery. But like I said, we ended 3Q with a relatively high reference price. So hopefully, I think Q3, given the uncertainty in the Middle East maybe we might be neutral or slight over -- a slight under-recovery or slight over recovery. So, I think Q3 could be in a neutral position. Then if the situation improves, right, then we could then go into a overrecovery position in Q4, right? But I think the key thing is that this over and under recovery mechanism is what I call a temporal arrangement. We will -- they tend to neutralize over time, right? So hopefully, that can give you a bit more guidance on how we see. In terms of growth-wise, we are always looking to grow City Energy, right? I think we mentioned -- we talked about the gas water heaters. That's an area that we like a lot, looking to really grow our market share over there, which could then lead to more better NPI from City Energy. And I would probably say, again, subject to how things are in the Middle East, I would say the most difficult period for City Energy is probably already over.

Rachel from UBS, your question, please?

I have 2 questions. So the first will be, what's the average age of your vessel fleet at GMG? So looking ahead for vessel acquisitions, will these primary -- trying to get a sense if these will be primarily used for fleet expansion or fleet replacement? And my second question is going forward, are you looking at larger scale acquisitions or bolt-ons for your existing businesses as well as what sectors will you be targeting?

Yes. I think for GMG, I think maybe I'll just give you a few data points, right? I think the average age of the vessel in the industry is probably about around 30 years, right? I think the average age of GMG vessel is somewhere between 25 to 30, maybe around 27 years mark. I would say our average age is in line with market, maybe slightly younger. The -- this is where I would draw a distinction between GMG and market. The market has placed a number of orders for new vessels, but I would say they are mostly for replacing a vessel replacements, right? Because there are certain players out there with pretty old vessels, aged 30 or 35 and above. They're looking to replace them, right? We don't have any vessels that will be too old or mature in the next 5, 6 years. So the secondhand vessel that I spoke about, that's not vessel replacement. It's actually an addition of vessels to GMG, right? So when it starts operations in end of the year, early next year, then we hope that, that will lead to additional revenue and income and DI from GMG.

I think also to supplement, we are quite open to the options of acquiring both existing as well as new build vessels for GMG. I think for existing vessels, although it doesn't really help the fleet age, but it does contribute earnings pretty immediately. And I think the purchase price is also, I think, attractive. In terms of new build, I think, ultimately, we are also opened an option given that you improve the average fleet each for our portfolio vessels. So, I think it's an option that we will consider.

And then I think you also mentioned, are we looking to do larger transaction and bolt-ons? I think the answer to both is yes. To me, they are not mutually exclusive. Given the KIT, I think we'd like to do larger transactions, things that move the needle. And because we want to realize, we have a very focus on value creation, right? And we do realize that when we bolt-ons, there's probably more opportunities for value creation, realization of synergies and so on. So yes, we'd like to do larger transactions. Yes. And yes, we'd like to do bolt-ons for our portfolio companies.

What about the sectors you're looking at?

It will be the sectors that we have always mentioned energy and energy transition, energy security, digital infrastructure, environmental services and so on. This, I think, are areas where there is very strong macro tailwinds behind them. And these are also the areas where Keppel has a lot of expertise over there. So, we want to play in areas where there's good growth and where we know what we are doing, we are able to value add and so on.

Okay. So back to the question on GMG. So is it a case where like coming in 5 to 6 years' time, for example, then you will have to spend more CapEx to keep the fleet size stable and to -- like to keep running in the same place, so to speak. Is this something that can interpret it as such?

Okay, not quite, right? So, I think when we bought the business, I think the GMG has about 6 vessels. We have acquired a secondhand vessel, that's not for replacing existing vessel. That's an additional vessel. So come end on this year, early next year, we will had 7 vessels to run. We don't have any vessels that have to be phased out or decommissioned in the next 5 to 7, 8 years, right? So -- and we do see a lot of opportunities for growth. We have customers asking us for more vessels. And if we do acquire vessels or commission new builds in the next few years, I'll say those are probably for increasing our vessel size and so on, right? So there's a lot of growth out there. We are trying to grow and of course, if a chance comes up to add vessels, we will announce to the market accordingly. As of now, I think we have -- we are focused on commissioning the refurbishment, so that it can add additional revenues to GMG.

Because the concern is that, let's say, we come to 2032, '33 or '34, then becomes a case of like unless you spend CapEx, there's going to be an earnings cliff, as you retire vessels. So, I think I'm looking at it from that angle.

So yes, come -- if you pass forward long enough, they will come a point in time where GMG has to replace vessels, right? And that vessel replacement can be through acquiring and refurbishing a secondhand vessel or doing a new build. And we have been setting aside capital in that events right? But in the immediate and near term, I think we're looking to grow the business.

So, I think to supplement Kevin's point, the condition of the vessels are actually very good, right? So there's no need for any retirements in the next 5 to 7 years. So any vessels that we acquired today, if they start contributing earnings, it will be accretive.

Thanks Rachel. Next, we have Troy from OCBC.

Okay. On Slide 13, regarding City Energy, could you please share more about the cost optimization measures, that were taken?

Yes. So for City Energy, I think given the under recovery situation, that we experienced in 2Q, the management team has been quite cognizant about reining in costs this year. So, we are putting in place a couple of initiatives, which will partially offset any impact that we have seen in 2Q, including cost optimization initiatives around marketing, customer acquisition costs, for example. So, these will present themselves throughout the year.

Thanks, Troy. Shekhar, back to you.

I have 2 more questions on 2 different business lines. The first one is on BKR2. So, I see there is a strong wind recovery this half. But just trying to remember, I know there was -- there's a feed-in tariff that will step down from October 2026. I think it goes down from EUR 184 to EUR 149. How should we assess the DI impact on this tariff revision, probably on a full year basis? Second is on the first half BKR2, is this a normalized run rate now? Was wind above average, below average? How should we look at this?

So Shekhar, I'll answer your first question first. Yes. So, I think you rightly pointed out that there will be a step down of the feed-in tariff in October 2026. And this was part of the information that we had disclosed at the time of acquisition in 2022. So there are a couple of factors to think about as we go into 2027. One is the feed-in tariff, which will step down but there is also an offsetting factor in the sense that the loan amortization will also be reduced. Taking into account these 2 factors, we are expecting about a $4 million impact on a full year basis on DI.

Okay. And for the first half, is this like a normalized run rate now for your wind? Is it above, below long-term average? What are you looking at it?

Again, I think the first half wind was stronger year-on-year. Again, I think wind is something, which is -- has been quite unpredictable over time now. So I'll put it as that.