Analyst to MIC: Internalise your management

As shares of Macquarie Infrastructure Company slid 15 percent in the two weeks to 1 July, one of the equity research analysts covering the listed fund has offered several solutions to “unlock the value” of its shares, including an internalisation of its management team.

Wells Fargo Securities argues in a research report that Macquarie Infrastructure Company (MIC) is trading at a “sizable discount” to its intrinsic value. Wells Fargo believes MIC is worth in excess of $20 per share, but its shares stood at $12.99 as of the date of the report, 1 July.

MIC owns a portfolio of North American infrastructure assets, including a network of aircraft maintenance stations, bulk liquid storage terminals located in US and Canada, a Hawaiian gas distribution company, and a Chicago-based cooling and heating company. It has been New York Stock Exchange-listed and externally managed by investment bank Macquarie since December 2004.

Wells Fargo said MIC’s valuation is depressed because its “diverse collection of operating segments provides no natural investor base”, its lack of dividends “limits support for the stock” and the high amount of debt on the aircraft maintenance business “creates confusion” about the firm’s balance sheet. The aircraft service business also faces “considerable uncertainty” whether or not it will recover from the decline in profitability it suffered during the recession, Wells Fargo said.

But Wells Fargo argued that none of these factors “should have a long-term impact on the valuation of the stock” and instead offered three solutions: resuming dividend distributions, which the firm halted in March 2009 in an effort to preserve cash for de-leveraging; spinning-off or selling the aircraft maintenance business; and internalising its management structure.

Last year, Macquarie-managed Macquarie Airports (MAp) severed ties with its parent in a bid to better align interests with shareholders and save money on management fees. MAp estimated that, by internalising its management, it could save shareholders A$30 million (€20 million; $25 million) a year in management fees.

The move prompted speculation that MIC might pursue a similar route. But at an August conference call, MIC chief executive officer James Hooke said “there is no active discussion about the internalisation of MIC” and added that internalisation “would result in increased cost to MIC shareholders”.

MIC shares edged up 2 percent on the day the Wells Fargo report was issued, closing on $12.99. The shares stood at $12.94 as of mid-morning trading on the New York Stock Exchange.