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

Highlights

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.

Our View

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.

Recommendation

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.

Picture looks good

• Good set of results, very positive signs: MIIF released 2012 Q1 results that indicate strong sustainable performance. Generally, pricing power was maintained and organic growth continues to be delivered.

• Changshu Xinghua Port (CXP) enjoying pricing power: The port slightly underperformed our expectations in volumes, but this was more than made up by “higher average tariffs on general cargo volumes”, raising revenues by 8.8% on a 2% fall in tonnage. A one-off expense with regard to building a temporary stackyard to store the large paper and pulp volumes dampened EBITDA margin this quarter to 43% from 52% – we expect full-year margin at 48%.

• Large 17.3% vehicle volume jump at Hua Nan Expressway (HNE) allowed revenue to step up 12.6%, beating our expectations. Management attributed the improvement to the opening of GuangHe Expressway, a complementary road which feeds into HNE, and the return of vehicles from the now-severely-congested Xinguang Expressway whose detolling last year reduced vehicle volume at HNE. The key risk remains a potential toll-rate reduction, but our valuation already factors this in.

• Taiwan Broadband Communications (TBC) growth exactly in line, with revenue growing 4.5% YoY and EBITDA margin up 0.9ppt. We attribute the margin increase to the high growth in the Digital TV (up 52.6%) and Broadband (up 6.6%) segments, for which we expect 38% and 7% full-year growth respectively. We see a potential for upward revision in the Digital TV segment in coming quarters if the current growth rate persists.

• Now DPU looks to be covered just after 2013: We expect the 5.5c dividend to be maintained. Given the improved outlook on MIIF’s assets, we now expect operating earnings to cover the dividend by early 2014 instead of late 2014, and even as early as 2013 if the potential upward revisions do materialize.

• Fund selling action halfway done: The Abu Dhabi Investment Agency (ADIA) reduced its stake from 10% to 4.9% in the last half year. We take heart in the emergence of two value-oriented funds—Asset Value Investors and Long Investment Management—as substantial share-holders. We believe the buying speaks stronger than the selling (which is for internal reasons).

• Still our high-yield TOP pick: At 9.6% yield, MIIF continues to outshine other yield plays, especially given the strong organic growth in their assets. Our RNAV for MIIF is maintained at $0.690, with the increases in asset valuations offsetting the fall in cash due to share buybacks. MIIF offers a very high yield, future dividend growth, and a decent capital gains potential. Buy.

High-yield TOP pick

• High-yield TOP pick: In our 13 Mar 2012 report titled “The Yield Hunt”, we named MIIF our top high-yield pick with a 9.6% dividend yield, ahead of three other stocks with a history of increasing dividends. We think investing in high-dividend-yield stocks is a way to protect and to grow wealth, particularly in an inflationary and uncertain environment.

• Fund out, funds in: Over the last months, we saw MIIF’s once-largest shareholder Abu Dhabi Investment Authority (ADIA) reduce its stake from 10% to 6% today. We think it is possible that it is looking to exit from this investment entirely, thus putting a near-term cap on MIIF’s share price.

For every seller there is a buyer, and we note that a couple of funds have bought up MIIF in force. These are Asset Value Investors (7.5%) and Long Investment Management Int’l (6.2%); both are value-focused. While we can only speculate on ADIA’s reasons for selling, the strong buying by two separate value-funds is indicative of their private valuations being sufficiently in excess of the market price.

• Another way to value MIIF is to note that management has already valued the three assets using the latest information, a lot of which is private and superior to publicly available data, resulting in an NAV of $0.8123 per share.

From this figure we would subtract the present value of all future expenses, totalling $125m (we have conservatively estimated this figure on the high side), equivalent to $0.1057, for a FV of $0.707, not too different from our DCF FV of $0.691.

• Price supports; dividend yield promotes outperformance. MIIF’s share buybacks are backed by S$110m in cash and a dividend yield in excess of 9%. We note that its share price tracks the market fairly closely (up until the recent outperformance), and the very high yield should ensure outperformance relative to the market each year.

• Focus on underlying value especially from a portfolio perspective: In our eyes, MIIF is a strong dividend play (9.6%) with significant capital gains potential (20%) for a total upside close to 30%. This combination is rather difficult to find elsewhere. The dividend is also likely to increase with asset growth—we forecast the next dividend growth in 2014F. We reiterate our Buy call with an unchanged FV of $0.690.

High-yield TOP pick

• High-yield TOP pick: In our 13 Mar 2012 report titled “The Yield Hunt”, we named MIIF our top high-yield pick with a 9.6% dividend yield, ahead of three other stocks with a history of increasing dividends. We think investing in high-dividend-yield stocks is a way to protect and to grow wealth, particularly in an inflationary and uncertain environment.

• Fund out, funds in: Over the last months, we saw MIIF’s once-largest shareholder Abu Dhabi Investment Authority (ADIA) reduce its stake from 10% to 6% today. We think it is possible that it is looking to exit from this investment entirely, thus putting a near-term cap on MIIF’s share price.

For every seller there is a buyer, and we note that a couple of funds have bought up MIIF in force. These are Asset Value Investors (7.5%) and Long Investment Management Int’l (6.2%); both are value-focused. While we can only speculate on ADIA’s reasons for selling, the strong buying by two separate value-funds is indicative of their private valuations being sufficiently in excess of the market price.

• Another way to value MIIF is to note that management has already valued the three assets using the latest information, a lot of which is private and superior to publicly available data, resulting in an NAV of $0.8123 per share.

From this figure we would subtract the present value of all future expenses, totalling $125m (we have conservatively estimated this figure on the high side), equivalent to $0.1057, for a FV of $0.707, not too different from our DCF FV of $0.691.

• Price supports; dividend yield promotes outperformance. MIIF’s share buybacks are backed by S$110m in cash and a dividend yield in excess of 9%. We note that its share price tracks the market fairly closely (up until the recent outperformance), and the very high yield should ensure outperformance relative to the market each year.

• Focus on underlying value especially from a portfolio perspective: In our eyes, MIIF is a strong dividend play (9.6%) with significant capital gains potential (20%) for a total upside close to 30%. This combination is rather difficult to find elsewhere. The dividend is also likely to increase with asset growth—we forecast the next dividend growth in 2014F. We reiterate our Buy call with an unchanged FV of $0.690.