Mingjian Enterprise Analysis: Kep Infra Tr is the "best example" of conflict of interest

Trust: The Fee Structure Aims to Align the Interests of Management Companies and Shareholders

A report from Corporate Monitor points out that Keppel Infrastructure Trust held a special shareholders' meeting in April 2022, where it passed a new fee structure for the management company despite facing an unusual 20% opposition vote: the base fee is 10% of distributable income, plus a performance fee. The performance fee is 25% of the increase in distribution per unit.

Analyst Suvro Sarkar from DBS Group Research subsequently downgraded his recommendation for the trust from "Buy" to "Hold," lowering the target price from SGD 0.57 to SGD 0.45. In his analysis report, Sarkar focused on the stability of the trust's distributions, believing that distributions for 2023 and 2024 would be lower than in 2022, with 2023's distributions supported by "capital optimization" (or debt refinancing) gains—this is a concerning trend.

However, some analysts remain optimistic about the trust, with OCBC Investment Research maintaining a "Buy" recommendation and a target price of SGD 0.50.

Shortly after the report was released, Keppel Infrastructure Trust reiterated during a dialogue with shareholders that the fee structure aims to align the interests of the management company and the trust's shareholders, as well as to enable the management company to strengthen its talent pool to accelerate the trust's growth plans. The management company requires greater resources to manage the diversified assets now spread across multiple jurisdictions, totaling approximately SGD 9 billion.

The report states that in the fiscal year 2023, when the trust used SGD 131 million in loans to distribute a "special dividend," the management company received SGD 13 million in base fees and SGD 33 million in performance fees under the new fee structure. Borrowing to pay dividends has worsened the trust's debt ratio, and it will soon need to raise more capital (through new share issuance or rights issues) to bring the debt ratio down to a reasonable level. If shareholders do not further invest in purchasing new shares, their equity will be diluted due to the rights issue. Therefore, borrowing to pay dividends is not beneficial for shareholders. Moreover, as long as the dividends increase year-on-year, the management company can earn performance fees, and the fluctuations in dividends will benefit the management company.

Since the implementation of the new fee structure, the situation of shareholder investment losses has worsened, with a total shareholder return rate of -14.5% from fiscal year 2022 to fiscal year 2024, worse than the -5.5% over the past 10 years.

Before the tariff war triggered a stock market crash in April, the trust's stock price had already approached SGD 0.40. The independent analysis firm Corporate Monitor released a research report on Keppel Infrastructure Trust on March 27, specifically using this trust as a practical example of internal conflicts of interest, deeming it "the best example." The report is titled "Keppel Infrastructure Trust (KIT) -- An Erosion of Trust."

Extended Reading

Mingjian Enterprise Analysis severely criticizes the fee structure adopted by trust external management companies, arguing that this has led to a significant increase in fees paid to management companies even when the trust's own business performance declines, totaling HKD 159 million over three years, nearly double the HKD 83 million in fees from the previous six years.

Kep Infra Tr, whose stock price has continuously declined significantly over the past three years, paid a total of HKD 159 million in fees to the trust management company during this period, serving as a "best example" of the internal conflicts of interest brought about by the external management company model. In mid-2022, the trust's stock price was close to HKD 0.60, and it is currently hovering around HKD 0.40, having lost about one-third of its stock price.

The trust management company announced the temporary withdrawal of the proposal to authorize the management company to allocate new units to the sponsoring institution and major shareholder controlling the trust the day before the annual general meeting on April 15, in light of the turbulent market environment. The performance report released by the trust a week later indicated that, excluding one-off expenses, its first-quarter distributable income would decrease by 32% year-on-year to HKD 45.5 million.