|Shares Out. (in M):||56||P/E||0.0x||0.0x|
|Market Cap (in $M):||2,871||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||1,198||EBIT||0||0|
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Macquarie Infrastructure Company (NYSE:MIC) – $51.63
Macquarie Infrastructure Company (MIC) is a long – with upside towards $70. The underlying assets are well-positioned and strategically valuable, with visible, contracted cash flows that should drive $3.75+ of dividends in 2014. While comps are imperfect, I believe in this environment, MIC should trade at a 5.5% yield. Through capital appreciation and dividends, I see ~40% returns during 2014.
MIC is neither overly leveraged nor distressed, but analytically complex, with a reasonably interesting (AA leverage, IMTT distributions) history. Pokey351’s March 2012 write-up was spot-on, and I’ll refer people there for additional background.
Many investors associate Macquarie withAustraliaand / or terrible toll road deals, however, the MIC holding company is decidedly different. MIC’s operating assets are as follows:
While all information is publicly available and MIC trades ~300k shares daily, the analytical framework is complex, with five different operating assets (two of which are not wholly-owned). Published, GAAP financials are confusing and the Company can screen poorly (CapIQ shows MIC @ 24x CY 2013E EBITDA). Operating assets must be modeled individually and then proportionally consolidated. I believe this framework is cleaner, as per the below table.
|Consolidated Revenue - $mm||FYE Dec-08A||FYE Dec-09A||FYE Dec-10A||FYE Dec-11A||FYE Dec-12A||LTM Sep-13A||FYE Dec-13E|
MIC’s portfolio should generate ~$505mm of wholly-owned pro forma (Galaxy) 2013E EBITDA. There are plenty of numbers and moving pieces, so for the sake of brevity, I’ll focus on IMTT & Atlantic Aviation (>80% of proportional EBITDA).
HoldCo / Capital Allocation / Valuation
Each asset’s debt is non-recourse to the parent, MIC, which itself is unleveraged. The debt of Hawaii Gas, District Energy and Atlantic Aviation is consolidated, while IMTT’s debt is not. Proportional consolidation should add and subtract 50% of the debt for IMTT and District Energy, respectively.
The cleanest way to analyze HoldCo’s cash flow is on a proportionally consolidated basis. Once adjusted for corporate expenses & other investments (e.g. MIC Solar through FQ3 2013), we have an Adjusted Proportional EBITDA figure. From here, we deduct proportional cash interest, cash taxes and maintenance capex (growth capex funded by specific project / subsidiary-level debt). This Proportional Free Cash Flow figure is complicated and perhaps not 100% intuitive at first, but is real, tangible FCF. The below table outlines Proportional FCF and provides relevant Capitalization / Valuation data.
|Proportional Free Cash Flow||FYE Dec-08A||FYE Dec-09A||FYE Dec-10A||FYE Dec-11A||FYE Dec-12A||LTM Sep-13A||FYE Dec-13A|
|Calculated Proportional EBITDA||241||228||291||279||314||334||362|
|Corporate Expenses / Plug||(3)||(1)||(11)||2||(16)||(9)||(9)|
|Reported Proportional EBITDA||238||227||281||282||298||325||352|
|Change in NWC||(1)||13||(8)||(44)||16||(20)|
|Cash Flow from Operations||141||140||174||148||219||244|
|Change in NWC||1||(13)||8||44||(16)||20|
|MIC Solar Adjustment||-||-||-||-||4||3|
|Proportional Free Cash Flow||106||98||146||145||158||205||222|
|FCF Per Share||$2.34||$2.16||$3.19||$3.14||$3.32||$3.83||$4.15|
|Incremental FCF Flow-Through||72%||89%||(56%)||78%||177%|
|Proportional Consolidation / Valuation|
|Reported Net Debt||1,212||1,185||1,114||1,098||935||719||806|
|District Energy Adjustment||(85)||(85)||(85)||(85)||(82)||(79)||(79)|
|Proportional Enterprise Value||1,672||1,970||2,324||2,624||3,479||3,974||4,068|
|EV / Proportional EBITDA||7.0x||8.7x||8.3x||9.3x||11.7x||12.2x||11.5x|
We have TTM proportional adjusted EBITDA and FCF of $325mm and $205mm. Note TTM figures are actuals, whereas I’ve adjusted 2013E guidance to reflect the acquisition of Galaxy Aviation ($18mm annualized EBITDA, 2.1mm shares, $90mm incremental debt).
From 2013E PF Proportional EBITDA of $352mm, I expect mid to high single digit growth, based on the following:
Puts 2014E Proportional EBITDA at $370mm:
By no means am I a dividend stock expert, nor do I focus specifically on infrastructure, but I think that yield is too high, especially for a business with solid underlying growth, reasonable leverage (weighted OpCo leverage @ 3.7x) and a sustainable capital allocation policy.
Utility stocks trade at 4% yields, but MIC is no utility. MLPs also trade around 4%, but the assets are much larger, with different operating characteristics. With an explicit acknowledgement of ‘there is no magic yield’, I think a 5.5% target is reasonable, even relative to HY (5.7%) or historical MIC trading levels (~5%). These assumptions get us to $68 + $3.75 or $72 total value, a 40% total return. Viewed another way, $68 implies a $3.8bn target market cap, or 15x free cash flow. I don’t think that’s an aggressive price for such a strong portfolio of assets.
The catalysts are not as ‘hard’ as I’d prefer, but you’re getting paid to wait. Here is the event path, as I see it:
As for the risks:
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