Event:
CitySpring Infrastructure has proposed a renounceable 11‐for‐20 rights issue at $0.39 per rights unit to raise $205m in net proceeds. The proceeds will be used to fund a partial buyback of the A$486m floating rate bonds ahead of their maturity in August 2015. Taking into account the interest savings from debt reduction and the enlarged base of 1,519m units, we lower our target price from $0.540 to $0.46. Maintain HOLD.
Our View:
The proposed capital injection is a preemptive move intended to deflect the effect of a negative outlook on Basslink bonds’ rating and to ensure that Basslink’s distributions to CitySpring will not be disrupted in the event of a rating downgrade.
Even though the use of the rights proceeds to partially buy back the A$ bonds will result in net interest savings of about $8.5m, the capitalraising exercise is still viewed as a negative on the whole as there is no financing of any yield‐accretive acquisition.
Temasek Holdings, the sponsor, has committed to subscribe for up to 85% of the rights units. If it were allotted the entire undertaking, the Singapore investment company will hold 48% of all units following the rights issue. However, the rights units are not subject to any lock‐up agreement that precludes their subsequent disposal by Temasek.
Action & Recommendation:
Assuming that the amount distributed to unitholders in FY Mar12 is kept at around the same level as in FY Mar11, we estimate full‐year DPU to be 3.3 cents in view of the enlarged unit base. While the dividend yield is still attractive, there does not seem to be any major driver for a re‐rating. Management is seeking organic growth in distributions to unitholders through the gas network conversion project for City Gas. However, the project’s timeline has yet to be determined. Maintain HOLD with a target price of $0.46.
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