Macquarie Infrastructure: Back From the Dead?

Includes: MIC, MQBKY
by: George Fisher

Macquarie Infrastructure (MIC - $14.50) is one of those in-vogue infrastructure investment vehicles that were popular between 2004 and 2007, but subsequently crashed and burned. Much like trees reforest after a fire, MIC is working its way back and is starting to gain investor attention once again.

MIC owns four intriguing and diverse businesses, but acquisitions created a highly leveraged balance sheet.

Atlantic Aviation (AA) is the most risky business of the four. AA operates 72 private jet facilities at 68 airports, and is the sole provider at about 50% of the locations. As the largest provider of ground services to business and personal jet traffic, AA was hit pretty hard by the decrease in jet usage over the past few years. Measured by monthly take-offs and landings, the market slumped from October of 07 to February of 09. Encouragingly, the market has seen positive growth since Jan of this year. As jet traffic increases with an economic recovery, so should AA’s performance.

Out of the current $1.15 bil in net debt, $832 is on the books of Atlantic Aviation. Debt covenants require a maximun 8.0 leverage ratio, and currently AA operates with a 7.3 ratio. The non-recourse nature shields the balance of the other business should AA become financially unstable. However, continued improvement in business jet travel should improve operating profits and reduce the ratio closer to 6.0. A large portion of MIC’s overall debt matures in 2014, and will need to be refinanced.

Combined, these businesses are estimated to generate free cash flow in the $2.50 per share range, or $115 million, for this year and about the same for next. Since 2009, virtually all free cash flow has been designated to reduce overall debt. As debt levels become more manageable by this time next year, free cash flow can be used to reinstate the dividend whihc was eliminated in 09. Investors have been waiting anxiously for this reinstatement.

MIC was riding the infrastructure investment wave and in July of 07 share prices reached a high of $44 with its cash flow supporting a $2.48 dividend. With the Great Recession, the elimination of its dividend,the announcement of the bankruptcy of its airport parking lot business,and along with the overall stock market decline, MIC stock price crashed to $0.90 a share in March of 09. MIC has been recovering ever since.

The attraction of MIC is the value of its businesses. It is estimated that based on competitive EBITDA comparisons to its peers, the current share price reflects no value for the riskier aviation assets. On a per share basis:

  • 50% ownership in IMTT bulk storage facilities is worth about $14 a share;
  • The Gas Company is worth about $4.90 a share;
  • 51% ownership in District Energy is worth about $0.66 a share;
  • Future corporate expenses is worth about $(1.61) per share.

This totals $18 a share in comparable valuations, with no value given to the Atlantic Aviation business.

Of the $2.50 fcf estimates for 2011, $1.42 is generated from IMTT and the utilities, with about $1.08 from AA. Using worse case-scenario and AA falls into loan default, MIC could jettison the company and its non-recourse debt, similar to the fate of the airport parking business. The remainder of MIC would have much less debt and more stable cash flow.

With the growth potential of IMTT, the steady income from the utilities and a potential turn-around in the aviation market, MIC’s worse days should be far behind it. Current share prices reflect less than the value of the three most stable assets, and the aviation business is being offered for free. While there is risk in the leveraged balance sheet, the base assets are trading at a minimum 20% discount to their $18 value, giving no consideration to the aviation business.

Operating improvements, further debt reduction and better operating ratios, along with more attention from Wall Street, should improve share prices to between $18 and $22. Buying on dips from its current price should accentuate potential returns.

In theory, one attraction to infrastructure investments like MIC is their steady cash flow and dividends during “normal” economic times. Shareholders may well see a resumption of cash distribution this time next year.

For more information, review the supplemental material dated Aug 5 from their 2nd qtr earnings announcement, found under presentations (see here).

As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation.

Disclosure: Author is long MIC and MQBKY.PK, and have been a shareholder since 2008