Eye on Macquarie Infrastructure Company Trust

Mar. 6.07 | About: Macquarie Infrastructure (MIC)

By Carla Pasternak

Macquarie Infrastructure Company Trust (NYSE:MIC) is part of a trio of companies run by Macquarie Group, an Australian investment bank. Portfolio holding Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund (NYSE:MFD) and Macquarie Global Infrastructure Total Return Fund (NYSE:MGU) are closed-end funds, while MIC is a trust (but not a real estate investment trust). All three own and manage infrastructure properties in the U.S. that generate stable cash flow. These assets are largely recession-proof and enjoy little competition. Specifically, MIC operates airport parking lots, corporate jet refueling services, a district water-cooling system, and a natural-gas distribution utility.

Based on the latest quarterly dividend of $0.55 per share, which annualizes to $2.20, the stock yields about 6.0%. The company distributes most of its cash flow to shareholders, although it isn't required to do so. Management said it expects the entire dividend to qualify for the reduced tax rate of up to 15%.

With $37.9 million in free cash flow and $27.1 million in dividend payouts over the past 12 months, the company has a conservative payout ratio of 72%.

The firm's strategy is to grow by acquisition. Last year, it bought a Hawaiian regulated gas utility and aviation refueling facilities with operations in 11 states. It also took a 50% stake in one of the largest bulk liquid storage terminals in the U.S. In an effort to focus on more profitable U.S.-based properties, MIC recently sold off its interests in a U.K. toll road and water utility.

MIC currently has a fairly steep debt load, with debt representing about 70% of total capitalization. Since the trust pays out most of its cash to shareholders, a shortfall in any of its businesses could affect the dividend payout. Still, its recent acquisitions are expected to prove accretive to cash flow and earnings are forecast to climb an impressive +66% this year.

That said, the stock has a volatile earnings history. Earnings for the latest quarter fell far short of expectations, posting a net loss of -$0.37 per share compared to expected profits of $0.19 per share. In a similar vein, consensus estimates for 2006 earnings have been revised downwards to $0.68 per share from $0.95 per share a week ago. Not only that, the company said it would need to restate the first two quarters' earnings to account for some derivative instruments.

Since MIC isn't a closed-end fund like the other Macquarie investments, it doesn't charge a management fee. But management does take a pretty big piece of the pie. Manager Macquarie Bank receives a sizable 20% performance bonus for quarterly share price returns above a benchmark utility index. The bank also gets 1.25% of MIC's market capitalization at year-end.

Action To Take: MIC has great assets and a savvy wheeler-dealer in Macquarie Bank, but its recent earnings surprises and revisions may be telltale signs that management needs to get its house in better order. The company is only two years old, and some investors may want to give it time to build a better track record as a public company.

MIC 1-yr chart

Disclosure: Author has no position in any of the above-mentioned securities.