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.

China to Release Pork Reserves as Prices Soar (DMG)

The news: Aiming to blunt a sharp rise in pork prices, China's Ministry of Commerce said Friday that it will release some pork reserves onto the market. It also plans to boost stocks from current levels around 200,000 metric tons at a gradual pace, likely so that releases of pork from its reserves will have a greater impact on price levels in future. At the current level, China's pork reserves, set up four years ago, are equivalent to a tiny fraction—about 0.4%—of annual pork consumption of 50 million tons, underscoring the difficulties the government faces in using such stockpiles to manage demand. The moves come after pork prices reached record levels last month, rising 57% from a year earlier and far outpacing a 6.4% rise in the country's consumer price index—itself the quickest pace of increase in more than three years.

Taking aim specifically at boosting pork supply, China's cabinet said Wednesday it would resume a RMB2.5b investment program to support large-scale pig farms, and provide a subsidy of RMB100 per sow. But the measures may take four to six months to show results, in line with the amount of time it takes to rear a pig for slaughter, analysts say.

Our thoughts: With PRC meat consumption growth expected to reach 61kg per person by 2015 (2009: 54kg), we believe that China Animal Healthcare (CAL) will continue to benefit from current tight supply situation as China aims to increase food production in the near term to curb rising food prices. We project 25% earnings growth in FY11, driven by contribution from two new vaccines i.e. food-and-mouth disease and blue ear. We maintain BUY with TP of S$0.42, pegged to 7x FY11F EV/EBITDA.

Singapore Airlines (KimEng)

Event:

Singapore Airlines (SIA) is leasing an additional 15 A330-300 aircraft from Airbus. The aircraft will be powered by Rolls-Royce Trent 700 engines. While this latest order reinforces confidence in its long-term prospects, the airline may be in for a bumpy ride in the short term due to higher fuel costs and moderating yields. We maintain our HOLD rating and target price of $14.40.

Our View:

The new aircraft will be leased for a minimum of six years with an option to extend the lease term. They will join the other 19 A330-300s already in service. The aircraft will be delivered directly from Airbus between 2013 and 2015. The A330 is a medium-range aircraft, and SIA will operate the two-class configured aircraft on routes within Asia as well as to points in Australia and the Middle East.

Along with the ongoing delivery of the A380s, as well as future orders for the A350 and Boeing 787, this addition is consistent with SIA’s policy of operating a modern fleet. This is particularly critical in the current fuel price environment, where newer aircraft are more fuel-efficient.

As with any new orders, it allows SIA the opportunity to refresh its product offering. Business Class will feature a new seat specially designed for regional and medium-range routes, in a 2-2-2 configuration. Economy Class is laid out in a 2-4-2 configuration and features a new-generation seat as well, which is also available on the Airbus A380 and Boeing 777-300ER aircraft.

With these new aircraft on lease rather than purchased outright, SIA continues to have an optimum mix between leased and owned aircraft for its capital management. This is also despite still having more than $5b in cash even after the upcoming $1.20 special dividend (book closure 4 August). This opens the possibility of more generous dividends in the coming years, subject to ongoing profitability levels.

Action & Recommendation:

We maintain our fundamental HOLD rating on the stock as we expect earnings to peak in the near term and risks such as higher fuel costs and a flattening of yields to persist.