Macquarie: High Yield in Infrastructure

12/07/2017 5:00 am EST


Ari Charney

Analyst and Associate Editor, Canadian Edge and Personal Finance

One stock that’s giving yield chasers a bout of anxiety is Macquarie Infrastructure Corp. (MIC). We added the stock to the Income Portfolio in mid-March, after it had already sold off, but it’s since declined further, notes Ari Charney, editor of Investing Daily Personal Finance.

While MIC’s recent earnings report was largely unremarkable, the stock dropped as much as 6.4% after third-quarter results were announced, though it recovered about half of the lost ground by that day’s close.

Remember, MIC is one of banking giant Macquarie’s publicly traded private-equity portfolios. They’re shrewd investors who don’t overpay for assets.

At a holding company level, MIC grew revenue 8% year over year, to $453.1 million, beating forecasts by 1.2% on the top line. The media focus on headline numbers such as earnings per share, but that metric isn’t a relevant gauge of this company’s performance since it distributes most of its cash flow to shareholders.

Instead, we look at cash-flow metrics such as earnings before interest, taxation, depreciation, and amortization (EBITDA) as well as adjusted free cash flow.

Although management leans on the latter when discussing results, I give the former more credence because there are a handful of Wall Street forecasts readily available for it, which means we don’t have to rely on management’s interpretation of MIC’s financial performance.

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On that score, EBITDA was essentially flat compared to a year ago, at $187.1 million, a result that narrowly missed estimates by 0.7%.

Though the Street doesn’t have a widely disseminated estimate for MIC’s proprietary adjusted free cash flow (FCF) metric, I’ll note that adjusted FCF grew 9.5% year over year, to $144.4 million. That covered the dividend by 1.24 times.

At the operating level, MIC’s two main segments, Atlantic Aviation (46.5% of revenue) and IMTT (29.5% of revenue), both grew sales and free cash flow, while the contracted power segment (9.3% of revenue) saw a moderate decline on both fronts due to weak merchant-power sales.

The power segment’s main asset sells a majority of electricity under contract, but about 37.5% of the electricity it generates is sold into wholesale markets, where pricing can be volatile.

Overall, MIC’s third-quarter performance was decent despite some of the operational headwinds. Meanwhile the dividend got another boost, to $1.42 per share, for a forward yield of 8.3%.

The fact that MIC holds a mix of disparate infrastructure assets means the market defaults to using a benchmark based on its largest business, midstream energy services. That means MIC is getting lumped in with MLPs, even though its midstream holdings account for less than half of its cash flows. The stock remains a buy below $90.

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