Macquarie International Infrastructure Fund

[weijian]

Hi Qiaofeng,

I have been puzzled by the share buy backs as well since it isn't typical of a business trust to return capital to unit-holders. In your post, you mentioned that share buy backs can increase A ie the market capitalization. But how does that work out ? Wouldn't share buy back reduce the market capitalization of the Company (assuming rationale market behaviour) since the company profit generating ability remains unchanged but its cash position would have declined slightly thereby making it less valuable than before ? Would appreciate your view in this matter.

(Not Vested)

Share buyback generally does reduce market cap. But thinking again, depending on the price u pay, maybe it may hv an effect of increasing market cap.

Part of Mgt Fee formula = Market Cap (A) - Cash (B) --> (keeping the rest out since it is nt currently active)

(1) B is fixed and the way to increase fees is to reduce B. So, naturally, they want to use it.
(2) Market has punished them (big NAV discount) for their some of their major accqusition failures (Arqiva especially) and i suspect they may hv learnt a lesson there. So the way to look prudent and reduce B, is to buy back the shares.
(3) Thereotically, a share buyback keeps management fee constant because A and B reduces at the same time.
(4) But the sharper a NAV discount u do the buyback n cancel the shares, the faster rate the NAV increases. Ie. Rate of NAV increase is directly proportional to NAV discount of share buyback/cancel.
(5) In future, if the market turns and the share price discount to NAV trends back to the [/u], we shd expect a higher 'effective market cap minus the cash'.

hi qiaofeng,
thanks for your views, u hv some good ones. I am a little confused about your posting below:

Performance Fee
The only way they can bring the share price up is by share purchase.
In effect, it is a value trap.

what do u mean by a value trap? I dont expect MIIF to be a growth company. It is supposed to be more like a dividend play.

Their record of accqusition/divestment is indeed weak in my opinion as well. Some shareholder questioned that in 1 of the AGM 2yrs back and the lead ID acknowledged it but also tried to let everyone see that Mgt did make some good $ with other divestments back in 2006/7. To be frank, when Arqiva was bought some time before the credit crisis, at that time, everyone (including myself) thought it was an excellent biz. It is, just that the financing part wasnt. Before 2008, MOST of us lived in a world where credit was sexy. Of course, when the tide came down, all those who believed credit was sexy, paid the price.

(vested)

[Drizzt]

Correct me if I am wrong but they didn't do even one cash call

[Qiaofeng]

Hi Qiaofeng,

I have been puzzled by the share buy backs as well since it isn't typical of a business trust to return capital to unit-holders. In your post, you mentioned that share buy backs can increase A ie the market capitalization. But how does that work out ? Wouldn't share buy back reduce the market capitalization of the Company (assuming rationale market behaviour) since the company profit generating ability remains unchanged but its cash position would have declined slightly thereby making it less valuable than before ? Would appreciate your view in this matter.

Do agree about the Arqiva disposal. Wiped out the 2006 - 08 profits. Previous CEO rode the credit boom and failed to exit before the bust. New CEO have streamlined it to just 3 core assets. Personally, now its more of an asset owner/operator than an asset trader (their old strategy). They should increase the transparency of their underlying assets as well.

Please feel free to post contrary views here. It would be great to see different perspectives on the same company and will therefore help investors (especially those who are not vested like myself) learn more about the biz model and their prospects.

(Not Vested)

I hope I dun offend weijian & other vested owners with my post.
Here goes...
Share buy backs clearly is for A reasons, it is the main reason supporting mkt price and deterring shorts in a bear mkt. Mkt Cap is Mkt Price x Outstanding shares.
W/o share buyback Mkt price plunges, hence MKT Cap plunges.
63,525,954 units out of 1,234,278,154 units is 5% of outstanding shrs. If the shares (treasury) are cancelled or use to pay management fees then U have same NI divided by less shrs pushing up EPS, DPS. NAV/sh also rises.

Also have the effect of reducing cash pile © down approx. $33-34m.

I think it is a value trap becos, if cost of equity remains elevated vs cost of debt, there is very little possibility for leveraging in coming acquisitions; this is crucial to the original MIIF biz model and cannot be effected.
If the cash cannot be deployed for this reason, the biz model breaks down, it stays as a 3 asset firm; share price cannot recover.

The management needs fresh stimulus to restart the biz model, a rights issue or new placements etc and most important a change in management.

[Nick]

Hi Qiaofeng and Wenjian,

In a rationale market, the share price of MIIF would increase to reflect the reduction of outstanding shares which in this case is 5%. But I don't think the increase in share price will lead to an increase in the market capitalization since there is no change in the underlying business with the exception of the reduction of cash (which is negative in valuation). Let me try to create a model to see how this goes:

Fund A:

Investments: $100
Cash: $40
Liabilities: $20
Equity: $120
Profits: $8
Outstanding Shares: 100 shares

Let's assume that the market demands at 10% yield from the Fund and values it at $80 or $8 per share.

Subsequently, the Fund starts to repurchase shares leading to 3 possible outcomes:

1) Fund purchase 5 shares @ $7 per share

Fund A:

Investments: $100
Cash: $5
Liabilities: $20
Equity: $85
Profits: $8
Outstanding Shares: 95 shares

Market would still demand the same 10% return from its investment thereby valuing the Company at $80. But things has changed - its cash pile has shrunk, so will the market still afford the same valuation as previously ?

2) Fund purchase 5 shares @ $8 per share

Fund A:

Investments: $100
Cash: $0
Liabilities: $20
Equity: $80
Profits: $8
Outstanding Shares: 95 shares

Market would still demand the same 10% return from its investment thereby valuing the Company at $80. But things has changed - it no longer has any cash, so will the market still afford the same valuation as previously ?

3) Fund purchase 4 shares @ $9 per share

Fund A:

Investments: $100
Cash: $4
Liabilities: $20
Equity: $84
Profits: $8
Outstanding Shares: 96 shares

Again, its profit generating ability and its investments remains unchanged yet its equity has shrunk so will the market continue to afford the same valuation as before ?

Another way to see it is the market perception of risk. In the earlier case, the market may have allowed it to trade at 8-9% yield since it carried a huge cash buffer. But after share buy backs, its profits remains unchanged but cash has been depleted so it is unlikely that the yield demanded will remain the same or even decrease which would lead to higher market capitalization.

Hence, I would say that share buy backs is essentially a return of capital by using the excess cash and returning it to the pockets of whoever had sold the stock on that particular day. Rationally, it cannot be market capitalization neutral since there is a reduction in cash similarly, it cannot be market capitalization positive since nothing has changed except a reduction in cash (which is bad). Of course, share price can trend upwards due to higher NAV/share, DPS/share, EPS/share etc but MIMAL fees are based on MC rather than share price or prevailing discount to NAV etc so its fees should trend downwards in a rationale market.

MIIF has changed substantially under the leadership of CEO John Stuart. The days of asset trading is over. Time will tell whether the shift towards asset owning and more importantly, asset control, will be beneficial to unit-holders.

Please point out any error/misconceptions made here. I am here to learn !

[karlmarx]

MIIF is in a net cash position with about $70mil after paying off debts.

most trusts are leveraged between 20% to 40%.

why does MIIF need a cash call to restart its business model?

it looks to me that MIIF just need to buy some investment worthy assets to demonstrate to the market the management's capabilities. discount to nav will close, in this case, when management shows some value-add.

[Nick]

MIIF is in a net cash position with about $70mil after paying off debts.

most trusts are leveraged between 20% to 40%.

why does MIIF need a cash call to restart its business model?

it looks to me that MIIF just need to buy some investment worthy assets to demonstrate to the market the management's capabilities. discount to nav will close, in this case, when management shows some value-add.

The underlying assets are geared. The debt in MIIF B/S refers to its 100% stake in Miaoli Wind (fully written off) and non-recourse to the Fund. Net cash is approx $120 mil and is being used to repurchase shares and fund any potential investments in the future. In descending order of size in MIIF portfolio, TBC gearing is 47%. HNE gearing is 60%, CXP is 19% and MW is 100% (equity 0). The overall Debt/EBITDA is around 5. Debt is repaid regularly at asset level and non recourse. Of course, this brings new set of challenges which is another story altogether ! It is isn't as highly geared as Cityspring. I guess similar level with most Trust with the exception of regular loan repayment.

(Not Vested)

[weijian]

Correct me if I am wrong but they didn't do even one cash call

they did 1 back in 2005.. But it wasn't a rights issue to existing shareholders. It was a share placement for instititutional and retail (existing/new shareholders can apply)

http://www.macquarie.com/mgl/miif/news?id=20051117_0

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I think it is a value trap becos, if cost of equity remains elevated vs cost of debt, there is very little possibility for leveraging in coming acquisitions; this is crucial to the original MIIF biz model and cannot be effected.
If the cash cannot be deployed for this reason, the biz model breaks down, it stays as a 3 asset firm; share price cannot recover.

The management needs fresh stimulus to restart the biz model, a rights issue or new placements etc and most important a change in management.

QF,
Thanks for your reply. There is no need to be afraid of 'offending' existing shareholders (me at least), as nick mentioned, more diverse quality views (no group think! haha) can allow all of us to make a more informed choice.
i see what u mean now. You are right - it is in some kinda of value trap but i would say something that is good. My divergent view stems from the fact that i see it as a dividend play - so i wld rather it uses its profits to pay dividends, pay down debt and focus on growing its biz organically/maintaining its competitive advantage, than let's say, making bombastic LBO type buys or gets into a bidding war (for example, Citispring). It is the sustainability of dividend payout that counts for me in this case.

But of course, on another hand, as a shareholder, of course i wld love for it to have a high share price that can regularly support yield accretive rights issue at discount prices. But somehow, i just don't have a very nice feeling on that esp the managers/sponsors seems to get to benefit more than shareholders when this happens...my 2 cents.

(vested)

[freedom]

to understand how share buyback increases the management fee, you should do comparison between with share buyback and without share buyback.

When there is no share buyback, do you think, MIIF share price will stay the same? If not, the share buyback will do 2 part: reduce cash, maintain or even improve share price (comparing with no share buyback, although number of share might be higher, price could be lower).

so net net, higher management fee.

[Nick]

to understand how share buyback increases the management fee, you should do comparison between with share buyback and without share buyback.

When there is no share buyback, do you think, MIIF share price will stay the same? If not, the share buyback will do 2 part: reduce cash, maintain or even improve share price (comparing with no share buyback, although number of share might be higher, price could be lower).

so net net, higher management fee.

Why are you looking at share prices only ? Management fees are based on market capitalization. Share buy backs will raise the share price but does it mean it will raise the market capitalization ?

I don't see why the market (rationally) would value a company higher AFTER it depletes its cash and still maintain similar earning ! If you value a company with $80 million earnings and $80 million cash at $500 million, would you consider paying >$500 million for it after it conducts share buy back and end up with $80 mil earnings and $10 mil cash ? I think not.

[freedom]

my mistake, should be maintain or even improve market capitalization.

simple supply and demand. if there is no share buyback, the seller could continue to sell, but if the company did not buy back, the share price will plunge given that its weak liquidity.

if the company becomes buyer, due to its weak liquidity as well as withdrawal of sellers because of showing confidence from the share buyback, suddenly, the demand will outpace the supply. the price might not fall and even rise significantly. the net effect could be much improved market capitalization compared with no share buyback.