Description

Macquarie Infrastructure Company LLC (MIC: $32.80) is trading at 8x my 2012 proportional free cash flow of $4.00 with a target price up 50% at $50. The company has been discussed in the past on this board - see Jazz678's writeup from 2010. There are several near term events that should serve as catalysts for the stock and which warrant the update. These include a legal resolution of a dispute with their co-investor over distributions of cash flows at IMTT. As well there is the end of the cash flow lockup at Atlantic Aviation and subsequent lowered interest rate reset.

Business: MIC is a collection of 4 businesses:

International Matex Tank Terminals (IMTT. 50% ownership), a bulk storage tank terminal business of which MIC.

Atlantic Aviation (100% ownership), the largest fixed base private airline operator in the United States.

The Gas Company (100% ownership), the sole regulated gas utility and largest distributor of unregulated LPG on the islands of Hawaii.

District Energy (50.01% ownership), a provider of cooling services to high-rise buildings in downtown Chicago.

For the purposes of this write-up I will focus solely on IMTT and Atlantic Aviation as that is where most of the value of MIC is.

International Matex Tank Terminals (IMTT): IMTT is comprised of 2 businesses – bulk liquid storage and OMI environmental. Nearly all of the revenue and profitability is generated from the bulk liquid storage business (93% of segment revenue, 97% of gross profit).

Within the storage business IMTT owns 43.6mm barrels of storage tanks with the main geographic locations being Bayonne, New Jersey (45% of terminal revenue, 44% of gross profit), the lower Mississippi River Region (41%/45%) and Canada. The major commodities stored are Petroleum/Asphalt (62%), Chemicals (26%), Renewable/Vegetable/Animal oils (8%), and Other (4%). These assets provide an essential link in the supply chain for liquid commodities and given strict environmental regulations, limited premium waterfront land, and community resistance to chemical storage facilities provide extremely high barriers to entry. Given these barriers to entry and IMTT’s premium locations the company demonstrates impressive pricing power, with storage price increases the last 5 years of 9.1%, 14.8%, 9.7%, 7.2%, and 13.3% with guidance of 6% in 2012.

While the 10K and management presentations do an excellent job in providing an overview of the assets I wanted to highlight the Bayonne, New Jersey facility and what I believe is an underappreciated opportunity. With the widening of the Panama Canal over the next few years there will be larger ships with the capacity to deliver more refined product into the North East. With 12 barges on the Kill Van Kull and docks dredged to 45 feet (with plans to go to 50 feet versus 35 feet for competitors) IMTT is the only company with the ability to quickly unload product from the large ships. As the 10K states:

“IMTT-Bayonne has the capability to quickly load and unload the largest bulk liquid transport ships entering NYH. The U.S. Army Corp of Engineers (USACE) has dredged the Kill Van Kull channel passing the IMTT-Bayonne docks to 45 feet (IMTT has dredged some but not all of its docks to that depth). Most competitors in NYH have facilities located on the southern portion of the Arthur Kill (water depth of approximately 35 feet) and force large ships to transfer product through lightering (transferring cargo to barges at anchorage) before docking. This technique substantially increases the cost of loading and unloading vessels. This competitive advantage for Bayonne may improve as the USACE is in the process of dredging the Kill Van Kull to 50 feet (with no planned increase in the depth of the southern portion of the Arthur Kill). Demand for third-party bulk liquid storage in NYH has remained strong during the past several years. “

Atlantic Aviation: Atlantic Aviation operates fixed base operations at 65 airports in the United States. These operations provide fueling and fuel-related services, aircraft parking and hangar services to owners/operators of jet aircraft. Fuel and fuel related services represented 82% of revenues and 66% of gross profits, while non-fuel services (de-icing, parking, hangar rental, etc) are the balance. The business has attractive barriers to entry as most airports have limited space for multiple FBOs and little incentive to add competitors given limited demand (these are private airplane hangars and there are only so many private planes). As a result operators receive long term contracts (Atlantic weighted average remaining lease is 17.8 years).

The business is economically sensitive with EBITDA bottoming in 2009 at $106.5m, down from $137m in 2008. EBITDA rebounded in 2011 to $126mm and the guidance for 2012 is $130 - $140mm.

Catalysts:

IMTT Dispute: MIC has initiated formal arbitration proceedings with the Voting Trust of IMTT Holdings to resolve a dispute regarding the distribution of cash flow from IMTT. According to the Shareholders Agreement (a copy can be found in the 10K) a dividend shall be paid “in an amount equal to the sum of cash flows from operating activities and cash flow from investing activities of the Company for the respective Fiscal Quarter less the amount of Capital Expenditure spent solely in respect of maintenance and environmental remediation issues by the Company for the respective Fiscal Quarter”. This amounts to $77m in 2010, $146mm in 2011 (there is $60m of 1x Oil Mop clean up from the BP disaster included in 2011), and $109m in 2012 of Free Cash Flow after maintenance capital expenditures. Fifty percent of that should have been sent to MIC as a dividend payment and none of it has.

MIC believes that pending a positive resolution of this arbitration they will increase the dividend from $0.80/share to $1.50/share annually, which would represent a 4.6% yield on the current share price. The arbitrator is expected to announce the decision in April/May of 2012.

Atlantic Aviation Cash Flows:  Atlantic Aviation is highly levered with debt of $780m on EBITDA of $130m in 2011, or just under 6x. As the company was able to get under 6x leverage by CYE 2011 the credit agreement allows for Atlantic to dividend $25m to MIC in 2012 and use the remaining free cash flow to pay down debt. Furthermore, beginning in October 2012 the cash flow sweep is reinstated through October 2014 however the interest rate will drop to L+170bps from 6.49% which should save the company $30mm pretax per year, or $0.40/per share.  

Valuation: I value the business on look through earnings and on a sum of the parts.

Sum of the Parts:

I define free cash flow as EBITDA - D&A - interest expense - cash taxes + (excess D&A over maintenance capX). The company is guiding to free cash flow of $3.50 - $3.60 for 2012. Management tends to guide conservatively and my numbers are based on bottoms up work on each of the segments in conjunction with management's targets for segment EBITDA given on the Q4 earnings call.

IMTT Free Cash Flow (50% to MIC) =   $1.45 - $1.62 in 2012 at 15x = $21.75 - $24.30

Atlantic Aviation Free Cash Flow = $1.38 - $1.53 in 2012 at 8x = $11.00 - $12.24; incremental $0.40/share from refi = $4.00

The Gas Company Free Cash Flow = $0.82 in 2012 at 12x = $9 - $10.00

District Energy Free Cash Flow (50.01% to MIC) = $0.11 in 2012 at 12x = $1.30

Corporate Expenses at $0.20 at 10x = ($2.00)

Sum of the Parts:

                                 Low       High

IMTT                      $21.75   $24.30

Atlantic                 $11.00   $12.24

Atlantic Refi           $4.00     $4.00

Gas Company       $10.00     $10.00

District Energy       $1.30     $1.30

Corporate              ($2.00)  ($2.00)

NOL                         $1.00     $1.00

TOTAL                   $47.05   $51.00

Look Through Earnings

IMTT                      $1.45     $1.62

Atlantic                 $1.38     $1.53

Atlantic Refi        $0.40     $0.40

Gas Company    $0.74     $0.85

District Energy   $0.19     $0.20

Corporate           $(0.20)  ($0.20)

TOTAL                   $3.96    $4.40

Catalyst