MIIF – AmFraser
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.
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.
MIIF – DBSV
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.
MIIF – AmFraser
Results In Line With Expectations
- Results in line with our expectations: MIIF exhibited a strong showing in its 1HFY12 results, with net income up by S$15.2mil to reach S$19.6mil.
- Major overreaction view played out well for us: In an earlier company update, we noted that a sharp decline in MIIF’s share price from ex‐div 57c to 50c on 5 June 2012 was a major overreaction to the estimated impact of the enforced reduction of toll rates from CNY0.75/km to CNY0.60/km on HNE. At that point, we highlighted that this would present an attractive entry point. MIIF is currently trading at 54.5c. Factoring in the impact of lowered tariffs and the opening of Guanghe Expressway, we are presently valuing HNE at S$128.3mil.
- Taiwan Broadband Communications (TBC) records improvement in margins: TBC recorded a 3.7% YoY growth in its overall revenues in 1HFY12 on the back of increases in subscriber numbers across all product segments. More noteworthy is TBC’s improvement in its EBITDA margin, which we believe can be attributed to the robust digital subscription and broadband‐subscription uptake. We believe TBC’s continued initiatives toward ramping up its share of the Digital TV market in Taiwan would pose upside pressure on its margin prospects. TBC raised an additional TWD1.5bil capital expenditure facility to facilitate its push into the Taiwanese Digital TV market and the management believes that initiatives on this front would help increase penetration rates going forward.
- A mixed showing for Changshu Xinghua Port (CXP): Despite clocking in a 6.0% YoY increase in revenue, EBITDA margin fell by 6.7% YoY in 1HFY12. While this was partly a result of a one‐off expense due to the construction of a temporary stacking yard, we believe this can also be linked to the gradual shift of cargo composition towards lower margin products such as logs and paper & pulp. We maintain our margin expectation at 48%.
- Expect 5.0c dividend in FY13F: We maintain our view that a 5.0c dividend would be a sustainable level for MIIF going forward given its existing large cash balance. A reduction in dividend to 5.0c would still present an attractive yield of 8‐9%.
- A tantalizing 10% yield: MIIF has declared a 2.75c dividend in the half‐year ending June 2012 and has guided for a 2.75c dividend in the second half. This translates into a very enticing yield of 10.2%. Our fair value now stands at S$0.655, which means that MIIF offers capital gains potential of 20%. This, coupled with a 10% yield, makes MIIF an attractive play in the current market climate. BUY.
MIIF – DBSV
Buoyant dividend income in 1Q
• Higher dividend income in 1Q12 driven by organic growth and bigger stake in Taiwan cable TV asset
• Key risk is toll rate cut at Hua Nan Expressway, but this is already expected
• Risk-reward continues to be attractive given 9.5% yield; Maintain BUY with TP of S$0.64
1Q12 results in line. The fund generated net dividend income of S$21.3m, up 181% y-o-y, largely owing to the higher 47.5% stake in Taiwan Broadband Communications (TBC), compared to 20% last year. Even if we strip out the impact of a larger stake, dividends from TBC grew 6%, in line with organic growth at the asset last year. To note, 1Q dividend income is derived only from TBC (half-yearly payout) as the other two assets – Changshu Xinghua Port (CXP) and Hua Nan Expressway (HNE) – only pay dividends once a year in the 3rd quarter of the year.
Underlying assets performance healthy. Operational performance at TBC in 1Q12 continued to be healthy with EBITDA growth of 6% y-o-y, as growth in digital cable TV subscribers surpassed expectations. HNE also surprised on the upside, delivering 14% EBITDA growth in 1Q12, driven by higher traffic volumes benefiting from traffic feed from newly opened Guanghe Expressway. At CXP, revenue grew 9% y-o-y but EBITDA fell 10% owing to margin pressures and one-off costs.
Fund remains well on track to pay out 2.75Scts semi-annual dividends in FY12/13. Operational performance at HNE and CXP is expected to remain healthy. The key risk is a possible toll rate reduction at HNE Phase I, as the Guangdong government will be introducing uniform toll road standards in 2012. Our numbers already reflect a toll rate cut at HNE Phase I of about 20% by mid-2012, but this could be further delayed, as there has been no communication yet from local authorities.
Yield of 9.5% is hard to ignore. No change to our SOTP valuation of S$0.64, as we have already factored in downside at HNE. Maintain BUY for close to 20% total return potential. A worst-case impact from toll rate cut at HNE could be a cut in FY12 DPU to 5.0Scts to smoothen the impact in FY12/13. This still implies 8.6% yield at current prices. The fund bought back 13.7m shares in 1Q12 and we expect share buyback activities to continue, given the share price discount to fund NAV and the lack of suitable acquisition opportunities in the near term.