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Infrastructure assets are the structures and networks used to provide essential services to society. These assets, and the businesses set up to manage them, are crucial to the sustainable economic and industrial development of a country.
The rationale behind CitySpring’s investment focus on this sector is mainly due to the sector’s healthy growth prospects. Asia (excluding Japan) is projected to invest about US$200 billion per annum over the next few years to fund new infrastructure investment and maintain existing facilities, according to the Asian Development Bank.
Within the infrastructure sector, CitySpring is primarily focused on three broad categories, namely, utilities, transportation/logistics and communications. Some of the assets in these categories include gas, water, electricity, roads, ports, airports, railways, broadcast towers and related infrastructure, satellite infrastructure, wireline infrastructure and mobile telephony infrastructure.
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CitySpring is the first infrastructure business trust to be listed in Singapore. It is backed by a strong sponsor, Temasek Holdings (Private) Limited (“Temasek”). It is Temasek’s intention to position CitySpring as its key investment platform for the infrastructure sector.
CitySpring has put in place a capital structure that is tax-efficient, thereby, enhancing potential distributions to unitholders. Under the Qualifying Project Debt Security (“QPDS”) scheme introduced by the Monetary Authority of Singapore, QPDS interest expense is tax deductible at the sub-trust level but that same QPDS interest income received by CitySpring from the sub-trusts is tax exempt.
Unlike other business trusts in Singapore, CitySpring offers investors the unique opportunity to invest in a diversified portfolio of infrastructure assets that generate stable cashflow on a long-term basis.
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CitySpring has a clear investment mandate which is to grow by acquisitions. We are very focused on this strategy and are always looking for investments that fit our stated investment philosophy and objectives. As CitySpring is primarily focused on the quality of assets that it may potentially invest in, it has not set any targets for the pace and size of its future acquisitions.
The healthy outlook for infrastructure investment opportunities bodes well for CitySpring. We are currently evaluating a number of opportunities in China, Hong Kong, South East Asia and Australia. Our objective is to provide long term, regular and predictable distributions and the potential for long-term capital growth to unitholders.
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Our pace of looking for high quality businesses has not changed amid the current weak global market conditions. We remain focused on looking at opportunities that fit within our stated mandate. Our primary objective remains on finding yield and value accretive opportunities for our unitholders.
Our current portfolio contains businesses with robust operations and strong fundamentals. We will only add to this portfolio if there are assets of similarly high quality at attractive valuations.
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Companies usually measure their performance using accounting profits. Business trusts also have to report their accounting profit for compliance with statutory regulations. However, a business trust, unlike a company, is allowed to pay distributions to unitholders out of operating cashflow. A company can only declare dividends from its accounting profit.
CitySpring as a business trust is able to make distributions to its unitholders in excess of its net profit after tax or even when it records a loss after tax, so long as the distributions are supported by the operating cashflow. It is not uncommon for a business trust holding infrastructure assets to show accounting losses due to:
(i) structuring to optimise tax efficiency;
(ii) non-cash depreciation expenses associated with infrastructure assets (which are typically capital intensive); and
(iii) other non-cash items accounted for as expenses in accordance with relevant accounting standards.
To calculate the available operating cashflow, CitySpring uses its accounting profit and makes adjustment for these non-cash items to arrive at its cash earnings.
CitySpring’s distribution is fully funded from operating cashflow and is paid after taking into account, among other things, the operating and capital expenditures requirements of the operating assets.
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Price to earnings (“P/E”) ratio is not an appropriate measure for a business trust like CitySpring. As a business trust and unlike a company, we can distribute surplus cashflow that is greater than our accounting profits. Our businesses, namely City Gas Trust, SingSpring Trust and Basslink, are structured to be tax-efficient to enhance cashflow which could adversely impact accounting profits and, hence, our results may show a low profit or even a loss. This translates into a high or negative P/E ratio.
This, however, does not affect our businesses in any way. In fact, since our Initial Public Offering (“IPO”) in 2007, we have reported quarterly results that are all ahead of our IPO projections. The operating cashflow from our businesses has also been stronger than projected at the IPO. With this stronger cashflow, we were able to raise our distributions above the IPO projection. Our distributions are more than adequately covered by operating cashflow.
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Our distribution policy is to make distributions to our unitholders out of our operating cashflow. Our operating cashflow consists of:
(a) distributions received from City Gas Trust, SingSpring Trust and Basslink; and
(b) after payment our operating expenses (including the Trustee-Manager’s management fees) and repayment of principal amounts, interest and other financing expense under our debt or financing arrangement.
The Trustee-Manager makes distributions to CitySpring’s unitholders on a quarterly basis. The amount of distribution is calculated as at 31 March, 30 June, 30 September and 31 December each year for the three-month period ending on each of these dates. Any proposed distribution is usually made by the Trustee-Manager within 90 days after the end of each distribution period. The distributions are made in Singapore dollars.
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The management fee comprises a base fee and a performance fee.
The base fee is 1% per annum of the market capitalisation of CitySpring, subject to a minimum of S$3.5 million per annum. This is structured to cover the ongoing operating costs of the Trustee-Manager.
The performance fee structure is based on 20% of a benchmark index outperformance. The performance fee is payable only when CitySpring outperforms the benchmark index on a total return basis and takes into account any underperformance in prior periods.
In addition, the Trustee-Manager does not receive any fees for acquisitions or divestments made.
CitySpring’s management fee structure is in line with market practice. It aligns the interest of the Trustee-Manager with those of unitholders.
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Given that our subsidiaries raise non-recourse debt structured specifically to match the cashflow profile of their underlying assets, traditional measures of leverage are not relevant to us. Our general philosophy on leverage is to ensure that our businesses have sufficient financial flexibility to meet their capital expenditure and operational needs, and at the same time, service their debt obligations promptly and reliably. The fact that Basslink is rated investment grade by the ratings agencies is a good endorsement of that philosophy.
The Trustee-Manager aims to optimise the overall capital structure of CitySpring and its infrastructure businesses, and will, therefore, seek diversified funding sources from both financial institutions and the capital markets as CitySpring grows in size and scale. In optimising the capital structure of CitySpring, the Trustee-Manager will also consider the appropriate use of both debt and equity financing. |
| CitySpring will fund its acquisitions using a mixture of both debt and equity, depending on which structure optimises its capital structure. It is noteworthy that infrastructure-related businesses tend to have higher gearing as they typically use long term debt financing. These debts, however, are often of investment grade quality as the interest financing is usually backed by the predictability of the long term stable cashflow offered by the underlying infrastructure assets. |
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