Macquarie International Infrastructure Fund

AmFraser Securities on 23 Oct 2012

OFFERING a distribution yield of 9.91 per cent, Macquarie International Infrastructure Fund (MIIF) distinctively stands out among high-yield alternatives. However, despite boasting an attractive yield amid the historically low-rate environment, MIIF continues to trade at a sizeable discount of 25 per cent to its book value. In this take, we seek to explore potential investor concerns underpinning the considerable degree of undervaluation of the stock.

Perhaps investors need more conviction about the sustainability of MIIF's distribution yield. MIIF reported a distribution yield of around 8.5 per cent in FY2011 and paid out a 5.5 cents dividend in FY2012. While MIIF has guided for another 2.75 cents interim dividend for H2 2012, which is to be paid in early 2013, investors may be concerned about the sustainability of its distribution payout, given the recent 20 per cent toll reduction on Hua Nan Expressway Phase 1 and growing debt amortisation at HNE.

Taking a relative look at Rickmers Maritime, the company offers a dividend yield of 7.9 per cent but is trading at a discount of 68 per cent to its book value. Although Rickmers has adopted a focus on the deleveraging of its balance sheet and successfully reduced its debt/capital ratio from 66 per cent in 2009 to 61 per cent at the end of Q2 2012, the fact that it continues to trade at a massive discount to its NAV probably suggests that more needs to be done to restore investor confidence in the wake of its financial troubles in 2009-10.

While MIIF certainly cannot be viewed in the same light as Rickmers, there may be a certain degree of investor apprehension about its ability to refinance its loans going forward. MIIF has a NT$2.3 billion ($96 million) loan due in 2013 and a NT$15.5 billion loan maturing in 2017 for Taiwan Broadband Communications.

Meanwhile, Changshu Xinghua Port has a maturing debt of 180 million yuan ($35.3 million) in July 2014 and debt of 175 million yuan to be repaid over 2015 to 2017.

Attractiveness as a yield play may have been dampened by half-yearly distributions. MIIF's appeal as a high-yielding play in the current climate may have been dampened by the semi-annual frequency of its distributions. Currently, eight out of 10 Reits and business trusts that distribute on a semi-annual basis are trading at a discount to their book value, while six out of 18 Reits and business trusts distributing on a quarterly basis trade at a discount to their book value.

The key question, clearly, is whether a 25 per cent discount to book value is overpricing in the aforementioned concerns. We believe so and have a target price of $0.670 on MIIF.