MIIF – AmFraser

Are Investors Pricing In Too Much Uncertainty?

Offering a distribution yield of 9.91%, Macquarie International Infrastructure Fund (MIIF) distinctively stands out among high-yield alternatives. However, despite boasting an attractive yield amid the historically low-rate environment, MIIF continues to trade at a sizeable discount of 25% to its book value. In today’s quick take, we seek to explore potential investor concerns underpinning the considerable degree of undervaluation of the stock.

  • Perhaps investors need more conviction about the sustainability of MIIF’s distribution yield. MIIF reported a distribution yield of around 8.5% in FY2011 and paid out a 5.5c dividend in FY2012. While MIIF has guided for another 2.75c interim dividend for H212, which is to be paid in early 2013, investors may be concerned about the sustainability of its distribution payout, given the recent 20% toll reduction on Hua Nan Expressway (HNE) Phase 1 and growing debt amortization at HNE.

    Toll rates on HNE Phase 1 were reduced from CNY0.75/km to CNY0.60/km on June 1 2012 and the full impact of the toll reduction has yet to be borne out in MIIF’s recent interim results.

  • Are investors worried about refinancing issues at MIIF? Taking a relative look at Rickmers Maritime, the company offers a dividend yield of 7.9% but is trading at a discount of 68% to its book value. Although Rickmers has adopted a focus on the deleveraging of its balance sheet and successfully reduced its debt/capital ratio from 66% in 2009 to 61% at the end of Q212, the fact that it continues to trade at a massive discount to its NAV probably suggests that more needs to be done to restore investor confidence in the wake of its financial troubles in 2009-2010.

    While MIIF certainly cannot be viewed in the same light as Rickmers, there may be a certain degree of investor apprehension about its ability to refinance its loans going forward. MIIF has a NT2.3bn loan due in 2013 and a NT15.5bn loan maturing in 2017 for Taiwan Broadband Communications. Meanwhile, Changshu Xinghua Port has a maturing debt of RMB180mn in July 2014 and debt of RMB175mn to be repaid over 2015 to 2017.

  • Attractiveness as a yield play may have been dampened by half-yearly distributions. MIIF’s appeal as a high-yielding play in the current climate may have been dampened by the semi-annual frequency of its distributions. Presently, 8 out of 10 REITs and business trusts that distribute on a semi-annual basis are trading at a discount to their book value while 6 out of 18 REITs and business trusts distributing on a quarterly basis trades at a discount to their book value.

The key question, clearly, is whether a 25% discount to book value is overpricing in the aforementioned concerns. We believe so and have a target price of S$0.670 on MIIF. Moreover, as stated in our earlier report, we believe a strategic review currently undertaken by MIIF is likely to act as a positive catalyst and potentially trigger a re-rating of the stock.

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