Australia | Aug 25 2006
By Chris Shaw
Consistent underperformance forces a management team has to act to lift returns, a prime example being Macquarie Infrastructure Group (MIG). The company yesterday released not only its profit result but the results of a restructuring of its assets that it hopes will lift performance and bring the unit price back up towards the value of its assets.
Brokers are not so sure though as opinion to the restructuring has been decidedly mixed, with some seeing it as the ideal moves to stem the share price slide and other questioning whether the company is headed in the right direction.
Macquarie is one of those in favour (yes, yes) the broker continuing to rate the stock as Outperform. It notes the changes, which include selling 50% of the company’s US portfolio to a Macquarie Infrastructure Partnership for US$762m and a revaluation of the M6 Tollroad, which is releasing enough funds to finance a $500m on-market share buyback, should see the company’s share price again find some support.
SB Citigroup agrees, suggesting some of the recent weakness in the share price has been because the market took the view the company had overpaid for the US assets. But with another party agreeing to a stake at the same price, this concern should be alleviated and the stock should be able to trade higher in the broker’s view.
The broker also points out having a partner in the assets gives the company another source of capital from which it can access funds for further acquisitions, which should provide some growth going forward. At the same time, Macquarie notes the company will still have capital available for additional capital management initiatives, so it sees scope for the buyback to be increased or followed by another buyback, while also noting a special dividend of 20-25c is possible.
It all sounds good then, except when UBS and Deutsche Bank offer equally convincing arguments as to why the moves are not so good for shareholders. To begin with, UBS is not happy with the process involved in selling the 50% stake in the US assets as there was no open tender, so it questions whether full value was achieved. Deutsche argues it wasn’t, as the broker values the US toll roads at about 35% higher than the price achieved.
UBS doesn’t see the other moves as doing enough to bring the unit price level with valuation either, suggesting management would be better served by closing the fund and opening a new one to focus on growth assets. Despite this view, the broker continues to rate the stock as Buy on valuation grounds.
Deutsche Bank also notes the restructuring means the company is now far removed from being a simple toll road company with stable cash flows, so valuations will be much harder to estimate going forward. As a result it notes the market is being forced to rely more on management guidance, which it points out has been sadly lacking in the past. To account for this increased risk the broker suggests the stock is likely to trade at a discount to valuation, which is around the $3.66 level. GSJB Were agrees, the broker taking the view the changes do little to create any long-term value.
The FN Arena database shows Deutsche is playing a weaker hand as it is the only Hold rating along with two Sell/Avoid ratings compared to seven Buy recommendations. The average price target on the stock is $3.58, which compares to a median price target according to Thomson One Analytics of $3.81.
Macquarie Infrastructure share today are slightly stronger, at 3.30pm the stock was trading up 7c at $3.07.