Missing the cash for the dividend

Event

Silver medal now, room to improve

MIIF’s 1H08 result was slightly behind our expectations, with the 4.25cps dividend
below our forecasts. We expect the operating environment to pick up in the 2H. Retain
view that MIIF offers good defensive qualities in an uncertain market. Buy maintained.

Distribution slightly below expectations
MIIF’s 1H dividend of 4.25cps was below our forecast of 4.35cps. On the back of this we have reduced our full year distribution from 8.8cps to 8.7cps and reduced our FY09 forecast from 9.2cps to 9.1cps (4.6% year on year growth). Net income on an adjusted basis was down 41.6%, however this was largely as a result of asset divestments.

Mixed asset performance
Of the major assets TBC was the strongest performer with EBITDA increasing 6.7% on an
increase in subscriber numbers and effective cost control. HNE showed positive traffic growth (4.5%), with its first distribution to MIIF expected by management in September this year. Arqiva recorded EBITDA growth of 6.0%, although margins declined due to the integration of the lowermargin BT SBS business. However, CXP continues to be weak on lower steel volumes, while the distribution from MEIF was slightly weaker than we forecast.

Still solid on debt
We remain comfortable with MIIF’s debt position given its weighted average asset debt maturity of eight years, interest rate hedging (54% through 2012), and no debt refinancings required until FY11. On a proportionately consolidated basis, MIIF gearing sits at 59% (comparable to other infrastructure peers), which we expect to remain at similar levels. During the half, MIIF paid down its corporate debt facility to S$53m (from S$178m) using the proceeds from its sale of MAP securities, driving down interest costs to S$1.3m (from S$3.7m in 1H07).

Maintain Buy recommendation
MIIF continues to show that it is well protected from adverse market conditions due to the stable nature of cashflows within its assets. We have lowered our valuation and target to S$1.12, largely reflecting tougher economic conditions, but we maintain our Buy recommendation as we believe MIIF has defensive qualities that are desirable in the current market uncertainty.

Why MIIF decided against rights issue

Shareholders raise concern about European asset sale

MACQUARIE International Infrastructure Fund (MIIF) did consider a rights issue to pay for its Asian assets instead of selling its European assets, the fund’s chairman John Roberts said yesterday.

But it decided a rights issue was not in the best interest of the fund or its shareholders, he told shareholders concerned by the fund’s switching from stable mature infrastructure holdings to buying assets in Asia’s high-growth but more volatile economies.

About 120 MIIF shareholders turned up yesterday at a special meeting to vote on a proposal to sell the fund’s 3.2 per cent interest in Brussels Airport and a 100 per cent interest in German oil tank storage business TanQuid.

Shareholders also voted on a proposal to receive their dividends in scrip.

The proceeds from the European sales will help finance the purchase of an 81 per cent stake in Hua Nan Expressway in Guangdong, China for about four billion yuan (S$778.7 million), MIIF’s first toll road investment in the world’s fastest-growing major economy.

One shareholder cautioned about investing in Guangdong given his own personal ‘difficult’ experience.

Another shareholder wondered if MIIF could have raised funds from the market through a rights issue instead of selling its stake in Brussels Airport.

Others asked about the pricing of the assets to be divested, given no tender was called and the buyers are Macquarie-related entities. They also noted that the two assets to be sold have given high returns of 9.2 per cent and 16 per cent.

Mr Roberts said that the returns from Hua Nan will be very strong, that he is confident MIIF will maintain and grow distributions consistently and that the acquisition is expected to be value-accretive.

He said the prices of the businesses to be sold exceed their book value and will contribute to a healthy internal rate of return.

The board did consider going to the market to raise funds for its Asian investment strategy, but decided this was not the time to do so, he said.

‘We felt that if we were to embark on public capital raising, when you included the costs of underwriting fees, issuing prospectuses, and a discount to the current market in order to attract the capital, that it was likely we would be issuing shares that would be probably closed to $1 type of price,’ he told shareholders. ‘We would be more comfortable seeing the share price appreciate a bit higher before we come back to the market.’

The board is ‘very protective of the share price’, he said.

MIIF was listed in May 2005 at $1 a share, which raised $800 million. A secondary exercise six months later in November at 96 cents a share brought in another $435 million.

The stock closed four cents lower at $1.04 yesterday.

Including this week’s purchase of Hua Nan Expressway, Asian assets now make up 35.8 per cent of MIIF’s portfolio, versus zero when it listed in 2005.

Mr Roberts assured shareholders that Hua Nan has a track record of paying distributions to shareholders since it was opened in 1999.

Use of the expressway has grown 13.7 per cent a year and currently some 37,000 cars use it, said Gavin Kerr, managing director of MIIF’s manager.

Shareholders passed all resolutions yesterday.

Macquarie Fund buys China expressway stake

MACQUARIE International Infrastructure Fund Ltd bought an 81 per cent stake in the Hua Nan Expressway in China for about four billion yuan (S$773.8 million), its first toll road investment in the world’s fastest-growing major economy.

The fund, managed by Sydney-based Macquarie Group Ltd, will finance the purchase from the sale of stakes in Brussels Airport and oil operator TanQuid, along with existing debt facilities, it told the Singapore stock exchange yesterday.

Managing director Gavin Kerr is selling non-Asian assets so he can focus on acquisitions in countries such as China, where vehicle sales rose almost 25 per cent in the first nine months of this year. The 31-kilometre Hua Nan Expressway runs through the centre of Guangzhou, the capital of Guangdong province and China’s third-most populous metropolitan area, the fund said.

‘Toll roads are cash generators and with low operating risk,’ said James Chua, who helps manage US$400 million of assets for Philip Capital Management in Singapore. ‘They are a good proxy for anybody who wants exposure to China’s infrastructure.’

The acquisition allows the fund to profit from Hua Nan Expressway’s tolling rights until 2026, and 13 per cent annual growth in traffic on the road since 2004, it said. — Bloomberg

Ask Macquarie some tough questions

THE managers and directors of Macquarie International Infrastructure Fund (MIIF) will have to tread cautiously in the next few months.

Their recent decisions to sell a substantial portion of the fund’s portfolio to other parts of the Macquarie Bank group merit close scrutiny by the fund’s shareholders and the wider investing public.

The most obvious questions that shareholders in the fund need to ask the managers and directors are: Would the assets fetch a higher price if they were sold to a buyer outside the group? Has the fund tried to sell the assets to other buyers? If not, why not?

Earlier this week, MIIF said it had agreed to sell its German oil and chemicals storage business for some 89 million euros (S$187.3 million) to another Macquarie fund, the LODH Macquarie Infrastructure Fund.

And last month, MIIF said it would sell its 3.2 per cent stake in Brussels Airport for some 52.8 million euros to Macquarie Airports Ltd, which is also managed by a wholly owned subsidiary of Macquarie Bank.

Together, the two assets comprise about 16 per cent of MIIF’s portfolio by value as at June 30.

MIIF has said it would meet its shareholders to seek their approval for both sales in November. Shareholders should ask their questions then, if not before.

In the case of the sale of the German asset, MIIF has also said that its audit committee is ‘obtaining an opinion from an independent financial adviser confirming whether the proposed transaction is on normal commercial terms and not prejudicial to MIIF and its minority shareholders’.

It must go further. The board should publish not just a summary of the independent financial adviser’s findings, but details of how it arrived at its recommendations, including the method used for determining the value of the assets. It should also address the question of whether the asset being sold would fetch a higher price in other hands.

This may seem a heavy burden, but it is the price for taking money from retail investors.

Investment vehicles listing on the stock exchange here are becoming increasingly complex, both in their legal structure and their target investments. Many, like MIIF, have large parent groups and are domiciled offshore – in Bermuda, for example.

The often remote nature of the assets they invest in, and the fact that many of the transactions take place between interested parties means that small shareholders in these vehicles must rely heavily on the recommendations of their independent directors to safeguard their interests.

By their very nature, these investment vehicles – ranging from simple property trusts to funds that invest in exotic structured financial assets – are riddled with potential conflicts of interest, as they often start out at the time of listing by raising money from outside investors to buy assets spun off from their parent group. In return, they offer ordinary people the chance to invest in assets that are not typically within easy reach.

The proposed asset sales by MIIF – and the unhappiness of some of its shareholders over the transaction terms – is a useful reminder of the potential conflicts of interest that are inherent in such investment structures.

Such conflicts of interest are difficult to avoid, but it is right that they should be subjected to robust examination by shareholders whenever they arise.

One suggestion that has been made is for MIIF to put the assets up for auction and to hire an independent party to manage the sales.

A close reading of MIIF’s listing prospectus suggests that the burden of ensuring that such transactions are conducted properly falls to its audit and risk committee, which comprises three independent directors and is chaired by Heng Chiang Meng, who also sits on the board of property developer Keppel Land. Among other things, the document states that ‘only MIIF’s independent directors will make decisions about transactions which involve Macquarie Bank group entities as counterparties’.

Shareholders should therefore hold MIIF’s board – particularly its independent directors – responsible for the decisions they make on these transactions.