MIIF - 86 cts @ 02 Jun 2006 (Infrastructure Fund)

MIIF offered its shares in May 2005 at an IPO price of $1.00. After touching a high of $1.24 in Jun 2005, the share price has been under-performing, hitting a low of 85.5 cts before ended at 86 cts on 2 Jun 2006. Attracted by its defensive nature of its underlying assets as well as the high prospective yields of 3.95 & 4.00 cts for H1FY06 & H2FY06, I have first vested in it on 2nd Feb 06 @ 94.5 cts and is currently holding 24 lots at an average price of 92.66 cts (average yield 8.58%) as of today.


Using daily closing price and total traded shares, the average transacted price over total volume is at 1.0538.









Share transactions Since IPO
1. New shares issued : 453,123 lots @ 96 cts - Nov 2005 (below price for original IPO investors)
2. Open market purchase : 1,230 lots @ $1.01 - Mar 2006 (HSBC INVESTMENT BANK HOLDINGS plc )
3. Open market sales: 1,488 lots @ 87.5 -89.5 cts - 24 May 2006 (HSBC HOLDING PLC)
4. Open market purchase: 250 lots @ 87.5 cts - 30 May 2006 ( Alternative Director, GREGORY KENNETH OSBORNE)

From MIIF presentation in Jan 2006:

All of MIIF’s underlying investments exhibit key characteristics of quality infrastructure assets:

- Provision of essential services
- Strategic competitive advantage; high barriers to entry
- Dominant market position
- Sustainable and predictable cash flows
- Potential for long term capital growth
- Experienced and capable operational management team
- Long term supply agreements or revenues governed by regulatory regimes
- Potential to optimise capital structure

Advantages

- Pays out majority of cash flows
- Growth through accretive acquisitions
- Infrastructure assets have significant barriers to entry
- Long term concessions of infrastructure assets of 25 yrs+
- Infrastructure assets have built-in organic growth
- Infrastructure assets are essential service providers; protected from economic fluctuations
- Geographical diversification

So why is MIIF underperforming given so many advantages and high prospective yield??

From the online discussion forums, I have gathered the following investors concern:
1. Complex accounting, difficult to understand (more time is required for the investor to familarise with the accounting, probably a few more accounting period is needed)

2. Multi-currency exposure & risks (management has hedged its distribution for up to Mar 2007)

3. Interest rate risks, highly leveraged (management has hedged the debts at an average length of 8 years)

4. High dividend payment might not be sustainable (more time needed to prove sustainability, this is my main concern too)

5. High base fees (1.5% of NAV) and performance fee of 25% of returns above 8% to shareholder (in my opinion, base fee is comparable to other type of investments, performance fee works inline with the returns to shareholders)

6. Is the asset acquired overpriced? (new assets must be earnings accretive, once acquired, any write-down is non-cash, but business must not be impaired)

7. Macquarie used IPO funds to buy own funds? Conflict of interests? (Macquarie bank has a reputation to hold & protect, many are institutional shareholders)

I believe we still need more time to develop faith in MIIF through its results and future distributions. The current under-performance is due to lack of investor's understanding of its business structure, similar to the situation when REIT was first introduced (CMT even postponed the original plan due to lack of local investors' acceptance and AREIT underpeformed for a period of time due to lack of faith on the returns from its industrial portfolio before the share price shoot up after consistent delivery).

What should I do?
The half year results is around the corner and the results & dividend are expected to be announced in mid July 06. The management has been relatively open and has been providing information when requested. Given the above analysis, the languishing share price is more because of investors' perceived problems than the fund itself. At current price of 86 cts, FY2006 yield is at a 9.24%, hence the share price should be more or less reaching its bottom. As MIIF is now a significant portion of my total investment, I will not be rushing to buy more. I might be considering to buy at below 85 cts after middle of Jun to early Jul to take advantage of the cum-dividend entitlements.

























Above chart shows AREIT share price underperforming from Dec 2002 to May 2003 before moving up. How much longer is MIIF share price going to take???