Friday, August 14, 2009

MacQuarie International Infrastructure Fund

The following is taken from grandmaster89 from CNA Market Talk forum. He attended the AGM and posted his opinion, as follows:

Current Infastructure Business Sector Outlook

Infrastructure businesses have long life-spans and a regular cashflow. They often have very large debts which are hedged against their regular cashflow. They pay large dividends to their shareholders based on the net income derived from –> cashflow – interest income. Currently, most infrastructure companies are still performing well in terms of operating cash flow and profits. The recession has not hampered their cash-generating ability in any significant way. The problem lies with their debts and refinancing issues in light of the credit crunch. Currently virtually all banks in Europe are unwilling to lend out large sums of money to any form of businesses no matter how high they are willing to pay for the interest. As a result, even though refinancing is far away, they cannot expect to get another loan from their lender. So they are left with 3 options – a) ignore the problem till refinancing occurs in 3-5 years time, b) solve the problem immediately with capital injection via a rights issue or c) use all free cashflow to pay down the debt (zero dividends). Most businesses are now trending towards the third option. So we are now left with good companies with excellent cashflow but poor dividends for the next 3 years. Asian-wise, the credit crunch has not affected Asian companies. There is much liquidity in Taiwan and China.

MIIF Policy of Debt

MIIF CEO John Stuart believes that since MIIF is an equity based company, she shouldn’t be using debt to pay dividends or buy assets. A leveraged fund is not what MIIF intends to be. As such, MIIF intends to reduce her corporate debts to near zero by 2011. Mr Stuart says the net debt level of 20mil will slowly be reduced till zero at 2011. The credit facilities will only be used as bridging loans or to facilitate the payment of dividends due to the timing differences of some distributions. These sorts of debts will be repaid within the year itself. Mr Stuart argues that being an un-leveraged fund, MIIF will be very attractive to investors and it might prop up the share price. Moreover Mr Stuart doesn’t believe in rights issues unless it is for growth. But even then, it shouldn’t be used needlessly since it dilutes shareholders value

MIIF Assets

Arqiva – Here is the biggest surprise for our largest asset. Arqiva holds around 2.7bil of debt and it intends to draw a further 500mil for its capex. John Stuart says this debt is unsustainable in the current economic climate. Due to a change of shareholders, the decision to pay a dividend will be made in Sept 09 after the board meeting. The board will decide on which of the 3 options will it take to reduce debts. Since Arqiva revenue and profit is growing, Mr Stuart believes that Arqiva will elect the third option and there will no distributions for the next 3 years. Currently, if there is an offer to buy Arqiva, Mr Stuart will recommend a sale to MIIF shareholders during the vote. We must wait for the Sept meeting before its position will be clear. Mr Stuart says the new largest shareholder Canadian Pension Fund has very deep pockets and was only interest in MCG for their stake in Arqiva. If they decide to pay down Arqiva debts in exchange for shares, this problem might be solved.

MEIF – Same story as Arqiva. Some of her assets will not be distributing income in the short term. As a result, her distribution to MIIF will be sharply reduced for this year. Only Thames had managed to get refinancing from her lenders. Mr Stuart said that MIIF was in the process of selling MEIF (and using the funds to buy Asian assets) in June 08 but the credit crunch derailed those plans. On another note, due to MIIF investment in MEIF, there is a 3 million dollar rebate on the management fees. If the share price dips to 15cents, the Management will end up paying shareholders since its fees will be less than the rebate!

Maoli Wind – MIIF smallest investment. Mr Stuart treats this asset with much derision and has more or less written it off. It was a mistake since its revenue was no where close to its estimates. The wind isn’t very strong!

HNE Expressway – Mr Stuart says this asset will start playing a large role in our income over the next few years. The opening of phase 3 will increase traffic by 10% a year. He expects the yield to increase over the next few years. He forecast that it will alone contribute to 1cent/share dividend for 2H 2009. It will rise in the next few years. In short term, the drop in economic activity in Southern China will affect it but not too significantly. It has a very bright future.

CXP – This asset would have similar distribution as the previous year if not for the one off legal expenses of 24mil RMB. It will be slightly lower. Its 2Q performance was very good. One of the better performing ports in China.

CAC – The credit crunch has not affected Canada too badly. Debt is more expensive but it still exists. MIIF made a further 10 million dollar investment in the 1H 09. He expects no significant drop in its distribution

TBC – MIIF star performer. Distribution will be similar as the previous year. Its operating cashflow has exceeded expectations with new products in the market.

MIIF Valuation of Assets

NAV remained constant this year at 87cents. Mr Stuart believes it may have reached bottom and should rise in the coming quarters. The drop in valuation was due to the credit crunch effects on the distributing cashflow of her assets. MIIF uses a discounted cashflow analysis over a stretch of 20-30 years with a discount of between 13-19% (depending on the level of risk). After the Manager decides on the valuation, it presents it to the directors (4/5 are independent). After which, it is presented to PriceWaterCoopers for their input. If there is a discrepancy, there will be a meeting and the Board will reflect the changes in necessary. MIIF also base it on real world asset sales (excluding fire sales). Generally there is very little discrepancy. John Stuart believes the stock price is extremely under-valued.

MIIF Dividend Policy

John Stuart says the current dividend of approx 20mil is sustainable in light of the credit crunch. He made light of the situation by stating that 6 months ago he said 3 cents dividends was sustainable and as such he has lost his credibility. This drew a lot of laughs.

For the 1H =

Income – 28mil
Dividends – 20mil
Investment made – 10mil

Mr Stuart says the days of 4 cents dividends every 6 months are gone until the credit crunch is over. Generally, some of the dividends were derived from one off special dividends from her assets which were regular in the boom times. Due to the economic climate, this 4 cents dividend is unsustainable due to the lack of special dividends and decreased distribution in arqiva and meif. Instead, distributions from HNE, CAC and TBC will form the new core for MIIF dividends. Including the 27 million dollars used to pay debts, for the 1H 09, 1.5 cents was sustainable. He did not forecast a 2H performance but generally it wouldn’t be less than 1.5 cents. He did expect HNE to contribute minimum of 1 cent dividend alone.

As I was eating, some investors were stating that an annualized dividend of 3 cents, MIIF has a yield of 9% which beats FD. Moreover since, the share price is so low, it can’t go down much so they plan to bargain hunt tmr.

Share Price

Mr Stuart believes that the current share price is no where near the Management valuation. This is the reason why the Scrip Dividend is not in place. Currently, the board is looking into all options to narrow the gap. He believes that the price will appreciate with the market but for it to hit back to its old price, its needs a major event to spark it off. He cannot give details as its share-price sensitive. But when queried for examples, he mentioned a sale of its assets with good valuation would drive up the price. The cash generated would be returned back to the shareholders or used to acquire a new asset or do shares buy-back.


MIIF is a nice and welcomed addition to my strategy and portfolio of defensive dividend investing. Infrastructures are generally more defensive plays in nature because they still need to be used be it boom time or recession. The downside: slower capital growth in bull markets.

To me, I still believe this is a gem for the long term. It is still rather undervalued, and much cheaper than CitySpring, which has run up too much in current times. This is something that will continue to be on radar.

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