Macquarie International Infrastructure Fund

[Nick]

Mutual funds like MIIF and GIL shouldn't carry debt at corporate level. It is extremely risky to use debt to purchase highly leveraged assets especially when the fund seeks to pay out the bulk of its free cash-flow. Both of these funds learnt that in 2H 08 when they slashed DPU to repay corporate loans. At asset level, all 3 income generating assets have long term amortizing loans - but this doesn't guarantee that they would be able to sustain dividend payout if their operating results start to become shaky. At the moment excluding corporate cash and the 100% impaired Maoli Wind, the core assets have a gearing of 50% but it must be noted that the denominator isn't Total Assets but rather Enterprise Value (MIIF equity stake at fair valuation + Debt).

MIIF closed at 54.0 cents giving rise to a yield of 10.1%. As always, determine the real yield before deciding whether the investment is worth pursuing.

(Not Vested)

[Nick]

http://kfc1973-stock.blogspot.com/2011/0...s-dmg.html - a short report from DMG detailing yesterday's results.

MIIF repurchased 1.570 million shares at an average cost of $0.5226/share today. There are 1,255,061,154 units outstanding and with the share price closing at $0.520, the fund's market capitalization stands at $652.6 million.

(Not Vested)

[Nick]

Over the past two weeks, MIIF continues to repurchase units from open market hence decreasing its outstanding units to 1,251,564,154 units. Since the start of the year, MIIF has repurchased 46,239,954 units from open market - a rare feat from a business trust ! Its market capitalization stands at $650.8 million and it needs to pay out $68.84 million worth of distributions annually to maintain its forecast DPU of 5.5 SG cents. Asset Value Investors Ltd (substantial shareholder) raised its stake from 5.52% to 6.02% in August 2011. The key question as always is whether MIIF is able to sustain such levels of distributions considering i) Its assets are highly leveraged at 50% gearing (based on Debt/EV) and has a loan amortization schedule ii) Its HNE toll-road concession expires in 15 years time iii) its substantial $137 million cash hoard.

(Not Vested)

[freedom]

I don't see loan amortization as weakness, instead, I view it as a good long term asset-owning strategy. I think the current reits' way of refinancing poses great risk, maybe one day even destroy reits as an asset class.

toll-road in China could be a very bad business in the near future. The Chinese government is trying their best to reduce logistic cost, which highway toll contributes a great part. There are a lot of talks about reducing or even removing highway toll to reduce operation cost, thus CPI will fall greatly.

[Nick]

I don't see loan amortization as weakness, instead, I view it as a good long term asset-owning strategy. I think the current reits' way of refinancing poses great risk, maybe one day even destroy reits as an asset class.

toll-road in China could be a very bad business in the near future. The Chinese government is trying their best to reduce logistic cost, which highway toll contributes a great part. There are a lot of talks about reducing or even removing highway toll to reduce operation cost, thus CPI will fall greatly.

It is highly likely that it would encourage vehicle owners to use toll-free roads in the future. MIIF's HNE toll-road reported lower earnings in the past 6 months due to competition from a neighboring toll-free road which was detolled recently. However, I don't think they have any legal basis to stop toll since it is part of the BOT agreement. A possibility would be to buy out the toll road from private owners ?

I have no qualms about loan amortization in general. I think PST model should be adopted by all business trust - repay what your borrow first before you consider paying a dividend ! I was highlighting that the TBC asset had halted its loan repayment for the next 2 years (since the rights issue was used to repay debt) hence more cash will be available for distribution. This might not paint an accurate picture of TBC distributions going forward in the future when loan repayment kicks in again. But nonetheless, TBC is a telco so it could just keep rolling over debts again and again assuming capex is manageable.

I would rate HNE as the most riskiest of MIIF's assets. It carries substantial debt of RMB 2.6 billion which have to be repaid over the next 10 years. Debt has been paid down annually but I noticed that the rate of repayment will accelerate in 2014 onwards so I am not certain whether it can maintain its usual distribution to MIIF. Moreover, with its concession terminating in 2026, the 'distributions' looks more like a return of capital !

I think a conservative investor should assume minimal distribution from HNE instead of the usual $20 mil per year.

Personally, I think MIMAL's strategy of buying back shares is a good move since it reduces the amount of distributions needed to make a similar DPU payout permanently.

[freedom]

if MIMAL think the profit will drop substantially, MIMAL should not buy back now. they will have plenty of opportunity to buy back later at a much cheaper price when the profit drops.

be careful with MIMAL's buyback strategy. it could be helping certain party unload their stakes. One disadvantages of share buyback is to help certain people unload at the expense of minority shareholders.

[Nick]

if MIMAL think the profit will drop substantially, MIMAL should not buy back now. they will have plenty of opportunity to buy back later at a much cheaper price when the profit drops.

be careful with MIMAL's buyback strategy. it could be helping certain party unload their stakes. One disadvantages of share buyback is to help certain people unload at the expense of minority shareholders.

That could be likely which explains why MIMAL only repurchased 46 million shares - approx $25 mil spent. It still have over $130 million to make further share purchases in the future if price do drop.

Quite hard to say whether they are helping people unload in 2011 since 1) Director bought some units 2) New substantial shareholder (Value Investors) and 3) Maq Group stake has increased from 8.8% in Aug 2010 to 9.9% today. However, we cannot discount the possibility you have raised - alarm bell should ring if one of those 3 guys are selling while MIMAL is buying. The interesting thing about MIMAL is that its fees are pegged to MIIF's market capitalization hmm.

[weijian]

Thanks for freedom for some sceptical insights. It is always great to have sceptics!

Based on MIMAL's past records, it is an average manager - It has made some mistakes but not the killer kind (eg. Cityspring overpaying for Basslink). It has been prudent ever since it got it wrong on Miaoli Wind, and i agree with Nick that the most interesting thing would be it's current sharebuyback scheme (countertuitive for MIMAL since buyback destroys market cap n reduces their management fees...but most value investors know that it is the most value add move)

My personal estimation of a robust MIIF distribution is 43million -> 31 (TBC) + 18 (HNE) + 4 (CXE) - 10 (operating expenses) = 43mil. Based on current no of shares, that translates to ~3.4cents/share. Using all 130mil of $ to buy back shares at assumed price of 60cents would bump it to 4.1cents.

So, IMO, 5.5cents/year is definitely unsustainable in the long run. In fact, tt is already priced into the market (yield at 10% now)

(Vested in MIIF)

[Nick]

The interesting thing is that none of us here are MIIF unit-holders LOL.

The Management means well - buying back stock, giving good quality reports (compare to Cityspring), avoiding rights, repays debts on asset level, holding semi annual investors briefing etc. But not very comfortable with its significant PRC exposure, concession-based and highly leveraged assets. I guess if HNE income do surge in 2012 then perhaps our fears of a massive cut in distribution in 2014 might be unwarranted.

As always, examine the sustainability of the yield in any business trust. If a Trust/REIT doesn't repay debt or conserve cash to replenish assets, how sustainable is the 'yield' !

[Nick]

MIIF repurchased 1.64 million units this week reducing its total unit float to 1,249,924,154 units. Since the start of the year, MIIF has repurchased 47,879,954 units or 3.69% of the original unit float.

If MIIF seeks to maintain its 5.5 SG cents distribution, it needs to generate net distributable income of S$68.75 mil annually. In other words, it needs to receive close to $80 million worth of distributions from its 4 infrastructure assets (of which 3 are income generating).

I don't think this can be achieved going forward since cash-flow will most likely be diverted to loan repayment at asset level in 2013 onwards. MIIF must either continue to repurchase shares ($100 mil could be used to cancel 181 mil shares at $0.50 each) to reduce the amount of distributable income needed or acquire an income generating asset to boost its distributable income and asset diversification. I could be proven wrong if the underlying assets show-case strong organic growth in the next few years. So I guess we have to wait and see what the Management does.

MIIF closed at $0.53 today.

(Not Vested)