Macquarie International Infrastructure Fund (MIIF) (DMG)

(UNRATED, S$0.56)

A $1b portfolio. Macquarie International Infrastructure Fund (MIIF) was the first infrastructure fund to be listed on SGX, back in 2005. Following a series of asset sales over the past few years, the group made a full exit from its investments in Europe and North America, whilst at the same time increasing its exposure in Asia. Currently, the group has 3 key investments: 1) a 47.5% stake inTaiwan Broadband Communications (TBC), one of the 3 leading cable television operators in Taiwan providing integrated entertainment and communications to more than one million households; 2) a 81% stake in Hua Nan Expressway (HNE), a commuter toll road in Guangzhou; 3) a 37% stake in Changshu Port, a multi-purpose port dealing in steel, forestryrelated products and containers. Cash made up the remaining 14% of MIIF’s S$1b investment portfolio.

Lessons from the financial crisis. Prior to the financial crisis, MIIF was invested in a wide mix of operating assets and listed funds in far-flung locations, from the UK to Canada to China.Debt was often piled high at the asset level as debt funding was cheap and abundant. The onset of the financial crisis resulted in a credit crunch and forced a number of its investments to focus on debt-reduction measures and even suspending dividend payments. MIIF’s distribution payout was affected as a result, leading to a downward spiral in the stock price. To strengthen its balance sheet, the group carried out a number of asset sales and moved to reduce gearing at individual asset levels. Today, MIIF is in a healthy financial position, while the streamlined portfolio is reporting strong operational performance, leading to higher distribution payouts that are more sustainable.

On the lookout for new investments.With a stronger balance sheet, MIIF is on the lookout for new investments. Its criteria for new acquisitions are 1) the acquisition must be yield-accretive, 2) the acquisition should offer double-digits internal rate of return. MIIF is highly selective in the type of infrastructure assets it targets to acquire, preferring low-risk investments that have a dominant market position, sustainable or predictable cashflows and offering potential for long term capital growth. It currently has $140m of cash to deploy, and has conducted share buybacks to enhance per unit value.

Trading with the highest yield in the business trust sector. For the 6 months ended June 2011, MIIF distributed a DPU of 2.75 cents. On an annualised basis, the payout of 5.5 cents would translate to a yield of 9.8%, among the highest for SGX-listed business trusts. On a P/B basis, the stock price has narrowed the discount to its NAV, from as much as 76% during the height of the global financial crisis, to the current 32%. We find MIIF interesting given its high and sustainable yield, which is higher than the sector average. The stock is misunderstood given its chequered past, and could potentially improve its ratings as underlying asset performance continues to improve.