Winding down is the best option
• Board initiates orderly process to divest stakes in underlying assets to realise true values
• Process could be lengthy and difficult though
• Special dividend from payout of excess cash in the near term should help support share price
• Maintain HOLD with higher TP of S$0.65
Current structure not best suited to realise value . Following the completion of a strategic review, the Board of Directors of MIIF are of the opinion that its current structure may not be suitable to realise the value of its underlying businesses, and that the stock is likely being undervalued by the market. As a result of the higher than-ideal cost of equity, MIIF’s strategy of driving growth by investing in Asian infrastructure businesses also cannot be executed properly.
Fund to wind down over time. As a result of these observations, and given the lack of acquisition opportunities, the Board has decided to distribute existing excess cash to shareholders via a special dividend, and commence the process of an orderly sale of its interests in its four assets. As and when the divestment of these assets is completed, the proceeds will be distributed to shareholders. The corporate-level debt facility will not be drawn down and lapse upon maturity. To ensure alignment of interests with shareholders the manager’s fee structure will be changed in due course.
Positive step, but upside may be limited. This strategy is intended to close the gap between share price and fund NAV. Without an acquisition story, we reckon the fund fee leakage was a key reason for this valuation gap. Excluding fund fees, our valuation for MIIF stands at about S$0.65 per share, still lower than fund NAV (internal MIIF estimates) of S$0.70 per share, as we are less optimistic on valuations for Hua Nan Expressway. We think it could eventually prove difficult and time consuming for MIIF to realise the true values of its investments, and given the uncertainties involved in the process, current entry levels don’t look attractive enough to us. In the near term though, investors can look forward to a special dividend of about 3.0Scts from the payout of existing excess cash reserves, in addition to the 2.75Scts final dividend for 2H-FY12. This should lend support to the share price.
A Superior Yield Play With Strong Potential Upside
A stronger showing than expected: Macquarie International Infrastructure Fund (MIIF)’s adjusted net income of S$60.2 mil has already surpassed our FY2012 estimate of S$52.3mil. The positive earnings surprises largely came from Hua Nan Expressway (HNE) and Taiwan Broadband Communications (TBC). We were more conservative on the growth rates in traffic for passenger vehicles, medium bus/trucks and large bus/trucks, and actual traffic came in about 6‐10% higher than our growth estimate across these segments. For TBC, its distributable income of NT$42.9mil exceeded our estimate of NT$41.2mil. While growth in the subscriber numbers for TBC runs largely parallel to our expectations, we were more aggressive on the cost front.
Impact of 20% toll reduction on HNE Phase 1 will be fully borne out in FY2013: Despite witnessing a double‐digit growth of 17.9% in overall traffic volumes for 9MFY2012, its distributable income plummeted by 22.7% on the back of the tolling revisions. Notably, this was partially cushioned by the impact of the opening of Guanghe Expressway, which is a complementary road to HNE, as well as the standardisation of toll rates in Guangdong Province. We believe these will continue to serve as positive contributing factors supporting our growth forecast of 12.3% in traffic volumes in FY2013. However, as FY2013 reflects the full impact of the toll reduction, we expect distributable income from HNE to decline by 16.2% in the following financial year.
TBC a crown jewel: TBC continues to deliver an impressive performance across all segments, which translated into a 47.9% growth in its distributable income. We are particularly bullish on the operational performance of the digital TV segment, as growth accelerates from a much lower base. TBC’s focus on establishing stronger penetration rates in the Digital TV market would certainly be a boon to the segment’s growth as well.
Changshu Xinghua Port (CXP) recorded 28.9% growth in distributable income for 9MFY2012, largely in line with our forecast. Growth was backed by higher log, paper and pulp volumes together with higher average tariffs on general cargo volumes.
A real head‐turner: As we roll over our estimates and lower our expenses forecast for FY2013, we raise our fair value to S$0.680. This means that MIIF provides capital appreciation potential of around 19.3%, not to mention its superior 10% dividend yield. We expect dividends to be fully covered by operational cash flows from FY2013 and raise our dividend forecast to 5.5c in FY2013. Furthermore, we see upside risks pending the outcome of MIIF’s strategic review. MIIF is currently trading at a massive discount of 21.5% to its NAV.
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.