Macquarie International Infrastructure Fund (DMG)

(S$0.56, UNRATED)

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. Currently, the group is invested primarily in communications and transportation assets. Key investments are: 1) a 47.5% stake in Taiwan 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 38% stake in Changshu Port, a multi-purpose port dealing in steel, forestry-related 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 minority stakes in listed funds in far-flung locations, from the UK to Canada to China. Debt was often piled high at the asset level as 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 resulted in the suspension of distributions. 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 level. Today, MIIF has been returned to financial health, with net cash at the corporate level and reduced gearing across its asset investments. The streamlined portfolio, meanwhile, is delivering steady operational performance, which we believe will lead to higher and more sustainable distribution payouts that are more sustainable.

On the lookout for new investments. With a stronger balance sheet, MIIF is looking out for new investments. Its criteria for acquisitions are 1) Yield-accretive, 2) Double-digits internal rate of return. This has raised the bar for acquisitions and to date the group has primarily deployed excess cash to increase its stake in existing investments. It continues to prefer low-risk investments that have a dominant market position, predictable cashflows with potential for long term capital growth. It has a war-chest $140m of cash to deploy, and in the meantime has conducted share buybacks to enhance per unit value.

Highest yield among peers. For the 6 months ended June 2011, MIIF distributed a DPU of 2.75 cents. The annualised DPU of 5.5 cents translate to a yield of 9.8%, among the highest for SGX-listed business trusts. The stock price has also narrowed the discount to its NAV from as much as 76% during the height of the global financial crisis, to the current 30%. We believe there is room for further re-rating for the stock as the market recognizes its improved fundamentals and potential for DPU growth on the back of organic and acquisitive growth.