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Macquarie Infrastructure Corporation: Stuck In Neutral

Summary

  • I am neutral on Macquarie Infrastructure Corporation because its business faces challenges and uncertainties in 2020.
  • The dividend yield is a tempting 10%, but it is offset by the stock’s non-performance.
  • The management team has made many assumptions while estimating its guidance, and chances are high that some of these may not hold good.
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First off, the crude oil market, unlike every other commodity in America, is virtually unregulated. ~ Peter DeFazio

After missing earnings estimates for Q4 2019, Macquarie Infrastructure Corporation (NYSE:MIC) is now staring at uncertainty in 2020. Going forward, two of the three business divisions of the company may get impacted because of the COVID-19 outbreak. This is a stock to avoid and I have assigned a neutral rating to it. Here are my reasons.

MIC’s Business Model

03MIC.jpg

Image Source: MIC site

Ninety percent of MIC’s business is made up of (A) handling and storage of bulk liquid petroleum and (B) running Fixed Base Operations (FBO) for the aviation industry. The remaining 10% of the revenues come from its gas utility business in Hawaii.

The main business divisions can face disruptions in 2020, and here’s an analysis of all the three business divisions:

(A) The Petroleum Storage & Handling Business

IMTT, MIC’s subsidiary, has been in the news recently. It has signed a contract with a 20-year take-or-pay contract with a joint venture of Valero Energy to provide storage and handling services. It will have to invest in constructing two pipelines and expand rail and marine infrastructure to fulfill this contract. Revenues will start flowing in from 2021-end.

IMTT will also expand its facility at Geismar to provide additional services to an existing customer.

About $150 million is expected to be invested in this business in 2020 and MIC expects an incremental EBITDA of $39 million annually – of which $6 million will start rolling in from 2020, $ 21 million by 2021, and the rest by 2022. Capacity utilization is pegged at around 85%.

COVID-19 has thrown a spanner in the works though. China is the world’s largest importer of oil and its demand has plummeted. Oil cargos have been


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This article was written by

Michael A. Gayed, CFA profile picture
29.07K Followers
Michael A. Gayed is portfolio manager, and author of five award-winning research papers on market anomalies and investing. He has a BS with a double major in Finance & Management from NYU Stern School of Business, and is a CFA Charterholder. Michael runs the investing group The Lead-Lag Report, focused on helping investors outperform in all market conditions. It offers a tactical, data-driven approach to investing, to achieve long-term success even in the face of uncertainty. With increasing market volatility, it's essential to understand risk-on/risk-off signals, seize high-yield opportunities, and leverage award-winning research to maximize returns. Learn More.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (25)

gnikregrub profile picture
king rat
MIC completed the sale of its portfolio of renewable energy businesses in Q3-2019, resulting in about $210 million in cash. MIC reduced overall indebtedness by $625 million in the quarter and exited at a net debt to EBITDA of 3.6x at the end of the third quarter. This ratio should climb though as spending moves on growth projects and the exit rate is expected to be closer to 4.1X.

The big surprise though was the pursuit of strategic alternatives. MIC announced in its press release that this was a realistic pursuit and it had already taken some steps in this direction.

Pursuit of Strategic Alternatives

In a separate press release, MIC today announced its intention to pursue strategic alternatives including the sale of the Company or its operating businesses as a part of ongoing efforts to unlock shareholder value. To facilitate the pursuit of strategic alternatives, MIC also announced that it has entered into a disposition agreement with Macquarie Infrastructure Management Inc. ("MIMUSA"), the external manager of the Company. The agreement was filed with the Securities and Exchange Commission this morning. A copy of the release can be found on MIC's website. MIC has appointed Lazard as its lead financial advisor and White & Case as its legal counsel in connection with its pursuit of strategic alternatives
B
@gnikregrub I'm wondering how the bidding for CBB fits into this strategy.
MoreTrout profile picture
Once again, MIC is NOT bidding on CBB. Macquarie Infratructure and Real Assets is a different entity than Macquarie Infrastructure Corporation. MIRA is the one bidding on CBB.

www.mirafunds.com/...
MIRA manages investments in 155 portfolio businesses, approximately 600 properties and 4.7 million hectares of farmland across 33 countries.

www.macquarie.com/...
The businesses MIC owns and operates are organized into three core segments:
International-Matex Tank Terminals (IMTT): a business providing bulk liquid terminalling to third parties at 17 terminals in the U.S. and two in Canada;
Atlantic Aviation: a provider of fuel, terminal, aircraft hangaring and other services primarily to owners and operators of general aviation (GA) jet aircraft at 70 airports throughout the U.S.; and
MIC Hawaii: comprising an energy company that processes and distributes gas and provides related services (Hawaii Gas) and several smaller businesses collectively engaged in efforts to reduce the cost and improve the reliability and sustainability of energy in Hawaii
B
@MoreTrout Thanks - misleading ticker in SA breaking news.
B
@Michael A. Gayed, CFA Any thoughts on the reported offer for CBB? Thanks
Hampton108 profile picture
Don’t believe one has anything to do with other...that Macquaire is a private holding company which is the parent of MIC...
SouthBayCapitalPartners profile picture
Interesting article that made some insightful points.

I would, however, take issue with the selection of companies like IRM or EPR as competitors. Iron Mountain is in document management/storage, data storage and related ares. EPR owns entertainment-oriented real estate including mini-golf courses and movie cinemas. Not comparable to MIC at all, and as a result, the metrics should not be compared.
mrmillion1 profile picture
Thanks for the article Michael. :)
u
Will continue my longtime hold of MIC. Staying as long as the dividend is reasonably safe.

Retired income investor
Hampton108 profile picture
No turning back for me, have owned MIC for nearly 4 years and down to $56.15 cost average, if there is any silver lining, I have collected a lot of dividends...
gardesign profile picture
"The dividend yield is a tempting 10%, but it is offset by the stock’s non-performance."

10% yield is a pretty fair performance to begin with, I'm fine with minimal growth if I'm getting 10%. Also, I've found that MIC offers nice option premiums, I write covered calls often on it.
surfgeezer profile picture
no mention of impending divesturles? They're talking about them on the call. Waiting to see what and cash flow impacts personally.
a
oh for goodness sakes...every business is going to be affected directly and indirectly by the possible recession induced Covid-19. Whether it be by industrial slow down, reduced consumer ism, or social panic. Hunker down, keep the powder dry, this event will pass and then buy in on the recovery. Health and insight to all.
M
As a retired airline pilot who also did a recent year and a half stint flying small corporate type aircraft, I somewhat disagree with your take on the coronavirus impact to Atlantic aviation. I used Atlantic frequently over the last few years and their FBOs as well as all of the others have been booming. While I can see the paranoid traveler avoiding Airlines I can't believe it will impact the well connected and the rich and famous in their private flights. But, I certainly have been wrong before.
Harry Polizzi profile picture
Where the hell do you get your information from?

"Per Seeking Alpha, MIC’s peers include Ladder Capital (LADR), Pattern Energy Group (PEGI), Iron Mountain (IRM), EPR Properties (EPR), and Washington Prime Group (WPG)."

NONE, not one of those companies are peers of MIC! And this is not the first article of yours that I've noticed ridiculous comparisons like the one noted above. Anyone who acts on your advice, using these inane "peers" shouldn't invest their own money.

Harry
MZHammer profile picture
FYI: He's finding them under the "Peer" tab.
K
@MZHammer Good catch.
MoreTrout profile picture
That was one of the first things I noticed too. Of course he is "just copying" them from SA which is probably the excuse. 1) Not an excuse for not being willing to do the proper research if you are going to write an article. 2) Yet one more reason I will NEVER spend a dime on SA and remain amazed that anyone wastes money on their Premium service. Their "editors" and data is nothing more than brainless copy and pasting from a variety of sources with absolutely no effort at actual editing.
Geloo profile picture
It should not take long for real numbers to come forward from the US on the CV. Those would be the actual death rate in infected individuals. Those numbers so far globally are suspect, especially from China. Hopefully those rates will be very similar to the flu, with elderly and sick patients at most risk. Not to downplay the potential, but presently the panic seems to bet it is X fold worse than flu. We should know pretty quickly.
gnikregrub profile picture
right information, wrong conclusion
thanks for the confusion
K
@gnikregrub
"thanks for the confusion" Likewise. I thought I understood when I read the article but now I am confused at to what about the conclusion is wrong.
W
Pretty bleak picture of the company's current prospects.

On the other hand, just as circumstances are currently affected by negative global events that suddenly and unpredictably happen so they can change for the better on a moment's notice.

I like to invest in opportunities that don't look good at the moment but have a positive future. Unfortunately a lot of positive investment advice is given only after an investment opportunity has already happened. It is like looking in the rear view mirror and missing out on what is up ahead.

In the mean time getting paid a very attractive 10% yield is nothing to sneeze at. And any positive development simply adds icing to the cake. So this is the perfect time to consider investing some of your idle cash.
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