Macquarie Infrastructure Group (MIG) Update

Submitted by Jim Thesiger on 9 May, 2008 - 14:58

Macquarie Infrastructure Group (MIG) has a $3.55 share price target and an Outperform recommendationfrom Australian stock analyst Macquarie Research Equities.

Pennsylvania could trigger 407 refinance

Pennsylvania Turnpike (~US$12-15bn) bids due imminently:

Announcement of the preferred bidder will determine whether MIG has participated (Macquarie/Cintra consortium) and to what extent. Following the announcement of preferred bidder, there remains a ~3 month process negotiating final legislature and approval. Terms of the lease include: 1) 75 yr lease; 2) toll increase of 25% on 1 Jan 09: 3) > 2.5% or CPI toll path thereafter.

Macq/Cintra win could trigger 407 refi (regardless of MIG's participation):

As majority shareholder (with a 53% stake), the timing of a 407 refi has been dependant on Cintra (CCIT.MC). We estimate the all-in cost of debt in Canada is ~20bps cheaper today than it was 12 months ago (due to substantial moves in the base rate from 4.25% to 3.65% offset by an increase in margin of ~40bps). We estimate a 407 refi would generate ~$0.7bn for MIG's proportionate stake (30%).

MIG now trading on ~14% IRR and ~37% disc. to NAB ($4.56 - Dec 07):

We think it would be difficult for management to justify acquisitions over re-implementing the buyback at current prices (recent buyback was +$0.11 accretive to NAB). Assuming MIG does not participate in the Penn. Turnpike deal & a 407 refi occurs, we estimate it will have ~$1.5bn cash to apply to another buyback & maintaining a robust B/S.

Valuation: $3.79 (Spot-DCF) / PT: $3.55 (12-month DCF)

Our PT is $3.55 (12-month DCF less 10% disc. for qualitative concerns). MIG has outperformed the ASX200 by ~4.7% YTD. We expect the defensive characteristics of toll roads, ongoing Macquarie Bank buying (~5% YTD), potential buyback & defensive B/S to be attractive differentiators in this market.