Nick Wrote:i) Are there any provisions/precedents of renewal of concession rights ?
I do not know of any renewals. I would think they are quite rare since the whole idea of BOT is that the private company builds it and then
gives it to the government, hence the "T" part of BOT. It would be highly unusual for the government to decline to take possession of a cash-generating asset, especially for free or a nominal cost.
Nick Wrote:ii) Will renewal come with 'forced' capex for the asset ?
Normally the utility is planned for maximum loading, so that when the government takes over it is operating optimally and generating lots of cash. If there is a need to expand the utility perhaps a new BOT contract may be awarded - but that would be separate from the old contract.
Of course, the company may negotiate with the government, but the government ALWAYS holds the upper hand since the company cannot just pack up the plant and bring it home.
Nick Wrote:iii) If there is no provision, why do business trust (KGT, HPHT, MIIF) pay out all of the cash-flow from these assets ?
Limited-life infrastructure trusts are basically a form of
knowledge arbitrage. Smart people sign the contracts and build the asset, then they sell it off to ignorant "investors" via an IPO. If the price declines enough they can be a profitable speculation or a special-situation investment.
But such entities are clearly not going concerns, because at some point the concessions expire and the cash flows vanish.
For example, take KGT. There are only 3 assets, Senoko, Ulu Pandan, and Tuas, and they run out in 2024, 2029, and 2034 respectively. So obviously the cash flows have a life of 13, 18 and 23 years respectively. Each asset's cash flow is independent and can be easily modeled since it comes from the Singapore government (no credit risk) and is mostly fixed (low variability).
Senoko pays $42.5m a year and lasts 13 years. Capex assumed to be zero. Breakeven price at 0% discount rate is $552.5m. Assuming 5% discount rate, the NPV is $399m.
Ulu Pandan pays $7m a year and runs out in 18 years. Capex assumed to be zero. Breakeven price at 0% discount rate is $126m. At 5%, NPV is $82m.
Tuas pays $11.5m a year for 23 years. Capex assumed to be zero. Breakeven price at 0% discount rate is $264.5m. At 5%, NPV is $155m.
Add the three NPVs and you get: $636m.
Units outstanding: 639m
NPV per unit: $0.995
Does this mean the fair value of KGT is $0.995 per unit? No. It only means that if you are willing to earn a 5% IRR over the next 23 years, you should not pay more than $0.995 per unit.
So why are some people paying $1.075 for KGT today?
1. They don't understand how to use DCF;
2. They are willing to earn less than 5% IRR over the next 23 years;
3. They believe they can resell their units for a profit; or
4. They believe KGT can make acquisitions that will meaningfully improve the IRR
Would I pay $1.075 for KGT today? I would have to be out of my mind.
Similar analysis can be applied to Hyflux Water Trust (RIP), Cityspring Infrastructure Trust, the various HKSE-listed expressway companies etc.