Event
CitySpring Infrastructure last week appointed a new chief investment officer to lead its hunt for fresh investments. But this move has had no positive impact on the unit price as the company’s balance sheet is still not strong enough for M&A activities despite the recent capital injection. Having underperformed the STI by 12% since the rights issue, CitySpring’s unit price is at an all-time low – 12.7% below the rights price – and it offers a dividend yield of 9.5%. Maintain HOLD and target price of $0.35.
Our View
CitySpring bought Basslink, its first and only acquisition post-IPO, for about S$1.5b in July 2007. Approximately 75% of the acquisition price was funded by the A$ bonds while the remaining 25% was initially funded by a bridge loan then. Since then, the company called two rounds of equity fundraising to address the Basslink-related loans. The dismal acquisition track record and existing debt obligations will make the closing of future deals highly challenging.
Under the new rule 704(31) of the SGX-ST listing manual, CitySpring disclosed several conditions that would cause a default of its loan agreements with DBS Bank, interest rate hedges and other facilities. These include a cessation of Temasek Holdings’ ownership of all units in CitySpring, removal/resignation of trustee-manager and/or more than 50% change in board directors (after Temasek’s stake slips below 20%). Currently, Temasek’s unitholding in CitySpring is 37.4% and the risk of a sell-off weighs on price performance.
Action & Recommendation
CitySpring’s underlying businesses are defensive in nature and have remained stable. Management guided for a full-year DPU of 3.28 cents per share. Our target price of $0.35 is based on the discounted free cash flow-to-equity model using a higher cost of equity of 10.4% (previously 8.3%). Maintain HOLD.
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