No spring in CitySpring's steps

Population growth slowdown to 1.7%, bad timing in fuel cost increase, and a cool weather is making the future look bleak for CitySpring.

Timing mismatch in City Gas fuel’s rising costs and the lag in tariff adjustment upwards has kept CitySpring's bottomline volatile. Meanwhile, the cooler weather is keeping Basslink in the negative and management has started renegotiating the terms with HEC. A slowdown in population growth is keeping the Group in search of new investments.

Here's more from Maybank Kim Eng:

The utilities businesses are largely driven by economic activity and population growth. With population growth projected to slow down to 1.7% and 1.5% p.a. in 2011-2015 for Singapore and Australia respectively, fresh investments through new service opportunities are probably warranted. The appointment of a new CIO in Nov 2011 attests to CitySpring’s growth commitment.

Delayed tariff adjustments skew bottomline. Due to the timing mismatch in City Gas fuel’s cost pass through or rising costs and the lag in tariff adjustment upwards, bottomline has remained volatile. City Gas has obtained three rounds of tariff adjustments in FY12. Nonetheless, bottomline losses are expected to persist in FY13, as City Gas continues to seek tariff increases as needed in order to catch up with the rising fuel costs.

Basslink remains a drag. Basslink’s income contribution continues to vary due to the Commercial Risk Sharing Mechanism with HEC in which if Basslink transmits more electricity to Victoria, it will share in the added revenue from the sales and vice versa. So far, cooler summer temperatures and more autumn rain has come and CRSM payments are expected to stay negative. The next CRSM review is scheduled in 2016, but management has started approaching HEC to renegotiate the terms.

Adequate buffer to support distribution. CitySpring is targeting FY13 DPU of 3.28 S-cts. While CitySpring’s bottomline remains in thered, cash earnings do catch up. With a cash balance of SSG$161m, distribution payments are expected to be sustained, at least in the near-term. Key downside risk is a deteriorating credit environment which elevates borrowing/refinancing costs.

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