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Macquarie International Infrastructure Fund (MIIF) Q3 2011 and 9 month results: 8% yield locked in

We profiled Macquarie International Infrastructure Fund (MIIF) a while ago as an infrastructure based trust that provides a 8%-11% yield at current price of $0.49 to $0.50 cents. [Commentary here and here]

We are anticipating the quarter results since they have increased the stake in Taiwan Broadband Communications and we would like to see whether they can sustain their dividend yield or the dividend yield potential based on this increased stake.

Results of Q3 and 9 Mth 2011 are out [slides and report here]

Recap the premise we highlighted here in the first commentary:

  • The dividend guidance from MIIF is $0.055. That is 11.2% yield. To pay out that, MIIF needs 1297 mil outstanding shares x $0.055 = 71 mil.
  1. Taiwan Broadcasting Corp (TBC) will contribute SGD 47 mil – SGD 49 mil per year. This is from its 47% share in TBC. Based on the original 20% stake in TBC, in FY 2010, TBC have loan amortization, TBC paid out 13 mil. In FY 2008, TBC have no loan amortization, TBC paid out 18 mil.  Going forward, we know that TBC will not be paying loan amortization and that cash flow have risen 10% since then. This works out to 18 x 47.5/20 x 110% = 47 mil.
  2. Hua Nan Expressway (HNE) will contribute SGD 20 mil per year. HNE have been struggling with a de-tolled expressway. Also in 2014 onwards, loan amortization will increase for HNE, any growth from 2014 onwards are likely to be eaten by the increase in loan amortization.
  3. Changshu Port (CXP) will contribute SGD 5 mil per year.
  4. Management Fees are estimated to come up to SGD 10 mil per year.
  5. Estimated Safe Dividend Potential: 47 + 20 + 5  – 10 = 62 mil. This is equivalent to $0.048 cents. At current price, the yield is 9.6%

Taiwan Broadband Communication (TBC)

By far the largest portion of MIIF portfolio now accounting for 51% of profit. EBITDA was 6.3% higher to last year.

Market leading broadband and digital TV services driving significant increases in multi-product sales. Digital TV is a key next growth phase. Currently it represents only 10.7% of total cable TV, and management thinks that substantial growth opportunities  via successful up-selling of digital TV products to basic cable TV subscribers exist.

Net adds across all sectors are slowing. We have to watch whether that becomes a trend. Doesn’t mean a big problem but it might mean churning and what the management promise a conversion to digital may not take place.

EBITDA margin is getting stronger.

Projected FY 2012 Cash Flow contribution to MIIF dividend payment

Year to date, MIIF received a total distribution of 29 mil.

This constitute a payment of 10 mil in March 2011 and 19 mil in September 2011.

We note that the purchases of TBC by MIIF is broken down in this way

  1. Total cost of purchase is S$479 mil.
  2. Initial acquisition of S$161 mil in Jul 2007. (33.6%)
  3. Acquisition of S$174 mil in March 2011. (36%)
  4. Securities issue consideration of S$143 mil in June 2011. (30%)

The 10 mil is made up of solely (2).

The 19 mil is made up of (2) and (3) plus 50% of (4).

Should profitability stay the same,

Half year payout in March 2012 should be = 19 mil x [1 / (33.6%+36%+15%)] = 22mil

The estimated cash flow from TBC for FY2012 will be = 22 mil x 2 = 44 mil.

Another computation is  = 10 mil x [47% stake/ 20% stake]  x 2 = 47 mil.

Based on 44 mil we have a shortfall to meeting my estimates highlighted in the previous report of 47 mil but it is a close enough estimate.

Withholding tax issue

There is an additional caveat. TBC received an assessment from the Taiwan tax authority claiming additional withholding tax on shareholder loan interest paid by TBC to its parent entity for the years 2006 to 2009

How substantial is this? I am still in the midst of trying to find out. But take a look at how in the report this is worded:

Management is of the view that no additional withholding tax is due as TBC has been fully compliant with all applicable rules and legislation and that it has documentary evidence to support the treatment it has adopted Based on the documentation submitted to the Taiwan tax authority, management is confident that TBC has been fully compliant with all applicable rules and legislation in relation to TBC’s withholding tax payments to date. TBC continues to work actively with the Taiwan tax authority to achieve a resolution of this matter

So they are replacing that they feel they are compliant to that a report submitted they feel confident that they meet the rules. We hope that this do not become a potential land mine.

Hua Nan Expressway (HNE)

Total vehicle volumes were lower by 9.5% due to the reduction in non-passenger vehicles which collectively was down 21.3% pcp. This is the result of lower manufacturing activity in the region and lack of buildup due to the Asian Games.

In addition the detolling of Xinguang Expressway contributed to a 5.9% decline in passenger vehicles.

Management is expecting to see lower manufacturing and commercial activity but will be offset by the opening of Guanghe Expressway in late 2011 and increase in vehicle ownership.

The reduction looks abit crazy coupled with escalating expenses.

Projected FY 2012 Cash Flow contribution to MIIF dividend payment

Hua Nan distributes once per year in September and for the past year it distributed S$ 22 mil.

We estimate a conservative 10% fall in contribution due to lower economic outlook. The FY2012 estimate cash flow contribution will thus be S$20 mil, which is inline with our estimates above.

Changshu Xinghua Port (CXP)

Revenues were higher due to higher cargo volumes which were attributed to a large increase in steel and log handled. Apparently management did quite a lot of marketing on logging.

However expenses were higher as well cause by higher sub-contractor costs, equipment rental due to increase in log volume. EBITDA margins grew as well.

Management sees the port benefiting from international steel trade and they are looking to diversify cargo types. However operating cost becomes an issue.

Projected FY 2012 Cash Flow contribution to MIIF dividend payment

CXP pay once per year in September as well. We estimate that the growth and cost cancel each other and that revenue should stay stagnant.

Thus for FY2012 the estimated contribution should be S$ 5.3 mil, which is inline with our estimates above.

Management Fees

There is a substantial increase of management fees. As management fees is calculated based on [Mkt Cap – Cash] x 1.5%, an investment in TBC causes a reduction in cash and increases management fees for the quarter from 0.9 mil to 1.9 mil

We estimate that for FY 2012, this amount will be 1.9 mil x 4 = 7.6 mil.

This figure will go down if the share buy back increases. This figure will go down if the share price of MIIF falls and go up if MIIF share price increases.

Estimated FY2012 Dividend Potential

Based on the results of these major contributors we estimate that for FY2012 the cash flow generated that MIIF can pay out as dividend = $44 mil + $20 mil + $5.3 mil – $7.6 mil – $3 mil (other costs) = S$ 58.7 mil

After numerous share buy back the current outstanding number of shares is 1254 mil.

This translates to a DPU of $0.047. At current share price of $0.50, the yield potential is 9.4%.

We are not far off from the estimation.

What is of note is that TBC, which is the main GEM here contributes $0.035 to the overall DPU which in itself translates to a nice yield of 7% based on current share price. This is equivalent to the highest yielding telco on SGX which is Starhub.

The caveat is that there are many other cost that I still have to make sense of. The gem in this investment is your forecast of TBC as well as how affected HNE and CXP is to a downturn in China.

The guidance is for a dividend payout of S$0.055 which I honestly think is a high figure compare to my $0.047 cents estimation. They need nearly 69 mil for that. If they do note pay management fees they could probably hit that.

I would rather buy this slowly based on my estimation. But secretly I am wondering what else I have not factor into my computation.

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Ser Jing

Monday 4th of June 2012


From MIIF’s Financial Reports for the Quarter Ended (QE) 31 March 2012, they reported Net Cash from Operating Activities (CFFO) of 1.2million. What is interesting here is the line item Revaluations of Financial Assets Through Profit or Loss of (ReVal) 8.3 million. If I hold a financial asset with an initial value of $5 and after a year, the asset is revalued at $10, it could perhaps be accounted for in the income statement but if I did not sell the asset, I do not see how I can account for that in the Cash Flow statement. I could not really understand MIIF’s reasons for placing ReVal in the Cash Flow statement even after looking through their Financial Statement notes.

Putting that aside, when we look at the Cash Flow statement for Financial Year (FY) 2011, we can see that CFFO comes in at 65 million while Dividends alone comes in at 58 million. For FY 2010, CFFO came in at 19 million while Dividends was 38 million! This would mean that MIIF has to dip into their cash balance to pay their dividends and Cash and Cash Equivalents from FY2011 was 110 million compared to FY2010’s 480 million. I understand that in FY2011, MIIF was investing cash to acquire more assets. However, the acquired assets are all slow, plodding businesses that would likely not see any good growth. Assuming that market prices would eventually reflect value, this would rule out MIIF having a high probability of having share price appreciation. Thus, any shareholder returns would have to come from Dividends but in MIIF’s case, when CFFO comes in below Dividends paid, the situation does not look good and makes me question whether MIIF can continue their dividend payouts. Their revenue growth for FY2012 looks to be hit even harder with the bad news concerning the Expressway, which adds to the undesirable outlook for MIIF.

With regards to MIIF’s strong non-current asset position, MIIF stated in their Financial Reports that they use a Discounted Cash Flow (DCF) methodology to arrive at a value for their financial assets (which makes up the bulk of their non-current assets). The discount rate and growth-rates used in their DCF analysis was not disclosed. The discount rate used for a DCF would have to stand up to the scrutiny of common-sense while the terminal growth rate for the DCF analysis would be really important in deriving the total value of their assets. These 2 important parameters are not disclosed and makes me uncomfortable with regards to their calculation of Net Asset Value.

Please feel free to point out any mistakes I have made in my admittedly simple analysis. Have a good day!

Cheers, Ser Jing

Ser Jing

Friday 1st of June 2012


I have been reading up on MIIF and think that their financial position does not seem to be that healthy. They have been dipping into their cash balances to pay their dividends as the cash coming from the ongoing operations of the expressway, port and TBC (MIIF also has a small investment in Miaoli Wind Farm) cannot sustain the dividend payout. On paper, their balance sheet looks to be really strong due to their non-current assets. However, the way their non-current assets are determined leaves alot to be desired in terms of transparency. Feel free to contact me if you have any comments as I would not mind discussing MIIF further. I might be way-off in my analysis of MIIF as there are certain aspects of their accounting which baffles me. However, on first glance, I would certainly be wary of MIIF.


Sunday 3rd of June 2012

hi Ser Jing, thanks for bringing things to our attention. MIIF has a history of being not really transparent with costs and their management fee as a % of distribution is pretty high at 11%.

Though that is not the highest. Whichever inaccuracy you can list it out so that we can see if they can sustain. my estimation is that they more or less can for these 2 years. but when Hua Nan Expressway increases their loan amortization their distributions will go down. Add to this woes are the recent 20-25% hit in profits and i think Hua Nan Expressway makes a bad deal.

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