Following a series of equity cash calls undertaken by Temasek-linked companies over the past few months, rumours are rife that CitySpring is one of those likely to undertake one soon, given its debt/equity ratio. However, its relatively deferred debt maturity and quietness in the M&A scene makes speculations about an equity raising rather premature.

CitySpring has no refinancing needs until 2011, when S$370m in term loan expires. The loan was taken to refinance the equity bridge loan used to fund 25% of the acquisition cost of Basslink, making Basslink 100% financed by debt. The management expressed comfort with the additional funding costs related to the loan given the stable cash flow support from the underlying businesses, but does not rule out raising equity in future.

Indeed, we believe that its deferred refinancing needs makes an equity cash call in the near term unjustifiable, especially if there is currently no attractive proposals for acquisitions and interest rates stay low. The ever-changing impact of huge non-cash hedging and translation losses on the NAV also make determination of rights or placement issue prices a complicated task.

The stable cash flows generated by the underlying businesses can more than meet its financing cost requirements and the management had indicated that the interest cover, adjusted for non-cash items, are way above all its loan and bond covenants. The Group also has S$98m cash in its coffers.

Concerns about equity raising and weakness of the AUD/SGD may curtail upside. Nonetheless, cash payout is relatively secured, implying a yield of 13.7%. We have adjusted our earnings estimates to reflect recent AUD forecasts and slower growth of its town gas business given the economic challenges faced by its commercial customers. We maintain our Buy recommendation with a lower Free Cash Flow to Equity (FCFE) target price of $0.62 (from $0.84), based on terminal growth rate of 1% and cost of equity of 10.8%.