Temasek to divest utility assets through business trust

The high-profile sponsor and the potential for co-investments between the trust and Temasek should attract investor interest, observers believe.
Temasek will spin off its gas and water utilities assets into a business trust that it aims to list in the domestic market, the Singapore-based investment company said in a release yesterday.

The IPO will be jointly arranged by DBS and Morgan Stanley and is expected to raise about $150 million, sources familiar with the offering say. Pre-marketing started yesterday after the business trust lodged a preliminary prospectus with the Singapore authorities. The formal roadshow is expected to kick off towards the end of January and the trading debut should be able to take place before the Lunar New Year in mid-February, the sources say.

CitySpring Investment Trust will be the first business trust in Singapore to focus on infrastructure and comes at a time when governments in Asia are becoming more open towards welcoming private capital to help finance their infrastructure build-outs. Investors are also keen to put money to work in this sector which typically provides a steady dividend income, but with the potential for strong capital growth as well.

The latest example of investor interest in infrastructure came in December when ChinaÆs largest designer and builder of ports, China Communications Construction Co, attracted more than 1,000 orders and about $160 billion worth of demand from institutional investors for its $2.07 billion IPO. The stock has soared 75% since its trading debut on December 15 to yesterdayÆs close of HK$8.07.

ôEconomic development and rapid urbanisation has put strain on many countriesÆ infrastructure, resulting in investment opportunities in many sectors including utilities, transportation and communications,ö the CEO of the company that will manage the trust, was quoted as saying in the release. ôCitySpring intends to tap these opportunities and invest in a diversified range of infrastructure businesses,ö Fai Au Yeung added.

According to CitySpringÆs preliminary prospectus, the Asian Development Bank estimates that Asia will require $250 billion per year until 2010 to fund new infrastructure investments and to maintain existing facilities.

The trust will be able to invest in a wide range of infrastructure businesses, including utilities, transport and logistics assets like ports and airports, and communications assets such as broadcast transmission infrastructure and satellite systems. The main geographic focus will be on Asia, the Middle East, Australia and New Zealand.

About 75-80% of the units will be sold to institutional investors, while a greater than usual 20-25% will be earmarked for retail investors - likely due to the fact that this is essentially a sell-down of public assets. (Singapore IPOs often earmark as little as 5% for retail investors.)

Temasek will retain 28.5% of the trust at the time of listing through two wholly-owned subsidiaries and may trim this further to 21.4% if the greenshoe is fully exercised. The firm is also the sole owner of CitiSpring Infrastructure Management, which will be responsible for the day-to-day operations of the trust, meaning it will retain a large degree of control over the assets.

Temasek will use its international reach and business network to support the new trust in sourcing for acquisition opportunities and intends ôto co-invest in infrastructure assets with CitySpring where appropriate,ö said the firmÆs Managing Director of Investments, Margaret Lui, who will also be a director on the board of the management company.

According to one observer the possibility of such co-investments with one of the most high-profile investment companies in Asia is likely to be attractive to investors. Temasek has about $80 billion worth of assets in its investment portfolio.

CitySpring will sell 321.75 million of the total 450 million units to institutional and retail investors combined. If the greenshoe is exercised, the additional 32.175 million shares will come out of TemasekÆs initial share.

The gas assets have been valued at between S$312 million and S$355 million, while the water plant assets have been assessed at S$62 million to S$78 million by independent valuer BNP Paribas Capital. This suggests a total asset value of the trust of about S$374 million to S$433 million ($243 million to $282 million) before taking account of any debt.

One source said CitySpring is likely to offer a dividend yield in the high single digits, or about 7%-8%, which would put it in line with that of Macquarie International Infrastructure Fund. The latter, which is also listed in Singapore, is currently trading at yield of just over 8% for fiscal 2007.

However, with CitySpring being a business trust (rather than a fund like MIIF), unit holders wonÆt have to pay tax on the dividends. According to the preliminary prospectus the trust will also use a project debt security incentive introduced by the Monetary Authority of Singapore to fund part of the acquisition of the water and gas assets. The incentive, which involves the issue of long-term subordinated debt, will make the trust more tax efficient and thereby enhance the potential return to investors.

The dividend yield will be well above the five-year Singapore government bonds, which return 2.95%. The 10-year bond yield is at only 2.99% after falling from 3.6% in July, a decline which has made high dividend instruments like the CitySpring business trust and the similarly structured Reits relatively more attractive.

MIIFÆs share price has struggled since it was listed in May 2005, however, and except for a few weeks in the first quarter it traded below the S$1 issue price for most of 2006, meaning the total return has been disappointing. It closed at S$0.99 yesterday (January 9). MIIF invests in infrastructure assets around the world, including airports, ports, aged-care facilities, renewable energy, oil storage, utilities and toll roads. Some market watchers have suggested that this could be a source of its weak share price as the large portion of non-Asian assets might prevent funds specialising in Asia from investing.

Initially CitySpring will own 100% of City Gas Trust, which is the sole producer of town gas in Singapore and the only company with a retailing license of this gas in the city-state. It currently supplies town gas to over 560,000 residential customers and also services the commercial and industrial sectors.

Its second asset is a 70% stake in SingSpring Trust, which is the owner of SingaporeÆs only large-scale seawater desalination plant. The plant has a contract with the Public Utilities Board to supply water in return for a monthly fee which is partly fixed, partly variable. The agreement will provide SingSpring with a predictable cash flow until it runs out in 2025.

The remaining 30% of SingSpring is owned by Singapore-listed Hyflux, which is one of AsiaÆs leading water and fluid treatment companies. A subsidiary of Hyflux has also been appointed as the operator and manager of the SingSpring desalination plant.
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