Yield may not be sustainable

  • Declares 2.75Scts dividend for 1H12, guidance for 2H12 maintained at similar level
  • Dividends are unlikely to be sustainable at this level in FY13 and beyond, as income from the expressway asset is set to reduce substantially
  • Downgrade to HOLD with TP of S$0.58

Write-down in value of expressway asset. MIIF declared 2.75Scts dividend for 1H12, and guided for a similar payout for 2H12, in line with our estimates. The key highlight was a write-down in the valuation of Hua Nan Expressway (HNE) by S$95.7m, as management accounted for the adverse impact of a reduction in toll rates announced in end-May.

Underlying results still robust. In terms of operational performance, Taiwan Broadband Communications continued to see healthy subscriber growth in digital cable TV, and 1H12 EBITDA was up 4.4%, in line with our estimates. Over at Changshu Xinghua Port, revenue growth was driven by log volumes, but higher one-off costs resulted in 8% EBITDA decline. Traffic at HNE grew strongly by 16% in 1H12 owing to positive impact from the opening of Guanghe Expressway, but revenue growth was more muted owing to reduced toll rates from June. Going forward, we expect HNE earnings to decline by 20% in FY12, and 30% in FY13.

Dividends unsustainable at current level. Though our valuations already affect much of the downside in HNE earnings, we revise down our valuation for HNE further to account for potential loss of revenue from a recently proposed regulation which will allow free use of toll roads during major public holidays in China. Hence, our TP is revised down to S$0.58. Downgrade to HOLD, as we believe a reduction in annual dividends from current level of 5.5UScts is inevitable. While DPS of 5Scts could be supported in FY13, dividends in FY14 and onwards could head lower, as the debt amortization profile steps up at HNE, potentially further restricting ability to upstream dividends to MIIF.

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