CitySpring Infrastructure

11 Dec 2008

CitySpring Infrastructure may be backed by big-shot Temasek Holdings and owner of Singapore's only water and gas supplier. But are these enough to make the stock risk-free and a guaranteed success?

Two analysts have given CitySpring the thumbs up for maintaining its dividends despite the troubled times, but to one it just isn't enough.

For a start, CitySpring is confident of hitting its projected distribution of 7 cents for FY2009. Its Q2 2009 revenue may have exceeded the business forecast as it climbed 31.7% to S$100.9 million, but CitySpring prefers to measure its performance by its cash earnings.

Cash earnings tumbled 90.2% to S$1.1m. This was because of higher fuel costs and lower fees because of an unexpected outage in the company's sub-sea electricity cable company, Basslink. As a result, CitySpring swung into a net loss of S$36.7m from a profit of S$1.9m for the 2nd quarter.

The business generated only S$12.8 m in cash from operations compared to the S$14.1m it generated last year. It paid a distribution of 1.75 cents per unit compared to 1.6 cents in the previous year.

DBS Vickers has a BUY on the stock, but it slashed its target price by more than half to S$0.75. It expects CitySpring to recover some of its costs in Q3 thanks to lower fuel prices. According to the analyst, the business is expected to enjoy stable revenues as its long-term contracts are with state utilities. Another revenue booster would be CitySpring's latest deal to provide broadband services to Tasmania.

SIAS Research was disappointed with CitySpring's lower cash earnings but it still holds a BUY call on the stock with a price target of S$0.64. It wasn't too pleased with the Basslink outage as it implies that the group may not always be able to earn full facility fees. But SIAS Research likes that the business managed to maintain its dividend payout despite its poorer performance. This is testament to CitySpring's healthy cash position.
Unlike stocks, trusts pays out dividends out of cashflow.

OCBC Investment initiated coverage on CitySpring with a HOLD call and fair value of S$0.80. It likes the company's non-cyclical cashflow and the fact that it is backed up by major shareholder, Temasek Holdings.

But the analyst does not approve of CitySpring's decision to fully depend on debt to buy over Basslink. It also finds the company's portfolio a little too lean for its liking and would like for it to beef up its portfolio through further acquisitions in future. However, with CitySpring's preference for 'debt-first/equity-later', OCBC Investment finds the group's current capital structure unsustainable.

Analysts surveyed by Reuters have on average an OUTPERFORM call on the stock with a target price of S$0.92

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