here from wallstraits tanjm explains how leveraging infra assets to get greater yields” This trend in leveraging up infrastructure assets is actually an old strategy updated into the 2000’s.

Recall in the 1980s and 1990s when leveraged buyouts (LBO) were common?

The typical LBO was as follows:
– find a business which is relatively stable, little debt and with stable cash flow.

– form a new entity with 20% equity and 80% debt.

– Buy the business – typically at a premium (e.g. 10% to 20% of fair value).

– Interest on debt is tax deductible.

– Use almost all available cash flow to pay off interest and principle payments

– after several years, debt is paid off. LBO has ended up with equity stake in original business.

Provided the underlying assumption about the stable cash flow was correct, the LBO made money because the after tax cost of debt was much lower than the return on the company’s assets – thus providing the opportunity to leverage on the difference.

Fast forward to 2005/6.

The phrase “manufacturing yield” probably was referring to the previous para. Despite the negative connotations of the phrase, there is nothing inherently wrong with it provided cash flows are stable and cost of debt is hedged – savvy investors just have to recognize and cater for it.

Another difference is that LBOs typically used 20-30% equity and 70-80% debt (at the cost of sharply increasing risk – any mistake in estimating cash flow could be fatal). In our case, it is more like 50-50.

The closest in description I can think of to a LBO among our yield plays would be Pacific Shipping Trust. PST is leveraged about 50%, but intends to use part of its cash flow to pay down debt principle over the next 10 years. As a result, you realize that at the end of 10 years or so, you end up with no debt on the original 8 vessels (and the structurers of this deal cleverly set it up so that the declining NAV caused by depreciation would be roughly matched by increasing NAV caused by debt repayment).”

it is so easy to push up a counter in the channel news asia forum, just as it is easy to push it down. the piece below is how  a person with the nick xueqi tries to advice people not to buy MIIF cause they are cheating us. Now, i for one will tell you it is not easy to understand their balance sheet. however, it is another thing to publish so called facts this way to create havoc to vested investors. the person in the quote is nickname bkkguy, but he is not the one that made the post as it is lifted to sgfunds forum.dnhh is explain why he feels what was posted is baseless.


bkkguy wrote:

Below are from MIIF’s first quarter report for your reference :
“MIIF’s Net Asset Value per share has decreased during the quarter, from $0.99 to
$0.96. This is largely due to the payment of a 3.1 cents per share dividend to
shareholders on 29 March 2006.”
You can see when they pay out 3.1 cents of dividen, NAV also drop 3 cents.

Check the B/S of MIIF again. Add up all the changes in Fixed Assets and Current Assets – Current Liabilities and Non current Liabilities. The ans is obvious not true.

bkkguy wrote:

From their cash flow statement, their cash flow is negative, because they pay out more than they earn. the dividen mainly from revalue asset and
some from new fund rising when they buy new asset.

I believe they can continue pay high dividen, but the NAV will drop as well,
of cause they can manage the NAV upward then pay you high dividen cos some their asset is not public listed.

1st. Revaluation of assets is just revaluation, no cash inflow or out flow. In simple word, how to pay out dividend from revaluation of assets? What kind of Cash flow statement is he looking at?


bkkguy wrote:

MIIF play finicail trick to fool you !! they include asset revaluation gain as income, for FY05, net income is $54,687K or 9.92 cents per share. you may not know that out of this $54,687K income, $53,687K is from asset revaluation gain.
If we following the normal account EPS policy for stock like SingTel or REIT like CMT[/B]

There is no financial or accounting trick. Revaluation is legal, not even creative accounting. Lot of companies are doing that to their Fixed Assets(especially property). SingTel may not revaluate their F.A, but CMT are highly likely to revaluate their Assets. So many property companies do that.

bkkguy wrote:

the actual net income will be only 54,687-53,687=$0.321K,
or EPS of 0.059 cents. so their cash income only enough to pay the huge expense, there is no actual cash flow to pay dividen.

Looking at the income statement(P & L ) to determine cash flow? If he study accounting before. I wonder how he passed his exam.

bkkguy wrote:

so how MIIF pay dividen of 7.9cents per share or 9% yield, most of the dividen is from return of capital or new equity funding. some of the new fund from new investor will used to pay the dividen. they can even pay you 20% or 30% yield, but the stock will drop as well.

Is it true? Check the cash flow statement, the ans is there.

I asked dnhh some queries on MIIF financial statements his replies are below:

this post is to be private.

Just from reading the income statement, B/S and cash flow statement.

1st is their revenue is too little. So it is not the total real revenue.
2005 revenue: 17,721.
Trade debtor and other receivables: 39,132.(see note 10: trade receivables — 11,800, distribution receivables — 12,899, interests receivables — 5,271, other receivable — 9,161)

It does not match. For a normal company, there is receivables because credits sale is made so the company is waiting to receive their cash from customers. Since MIFF is a fund, things are different. I do not understand how the revenue and trade debtor come about.

* Spend some time reading the note 2. Summary of significant accounting policies. Should have some explaination.

For 2005 cash flow, you are basically right. After netting off here and there the cash inflow of 11,727 basically from issuing of shares for performance fee of 28,140.
28,140 is cash inflow when money is paid for the shares.(not sure by who)

For Q12006. The cash inflow is basically coming from collection of debtor — 22,826. (trade receivable decrease from 39,132 to 16,312)

To understand the whole FS of MIIF, you need to know when and how MIIF is form, how and revenue from where, fair value of financial assets thru profit and loss(I do think some revenue do come from here, it is the way of accounting for revenue).

I do not understand MIIF. I can say that there is cash inflow in 1Q2006. But that 22,826 is questionable as well. Since MIIF is a fund, which mean cash inflow is not evenly distribute thru out the year. Check 2006 year end cash flow, anything can’t hide much by then.(2005 seem to be a fake year, paying dividend just to make investors happy)

The thing abt making a decision out of an investment dilemma is that you worry a lot about how ,if the result turns out to be the opposite of what you predicted, you will have a verq nasty feeling. That’s how i’m feeling abt MIIF right now.Currently, it stands at around 91 cents. That’s nearly 7% from my previous purchase at 97.5cents. Yield has gone up to 9%.

You would have heard all the debate on MIIF’s cashflow. I have looked into it as well and have to agree that it is quite a minefield to navigate through their report. Leisureworld, one of its late acquisition, gets revenue sources from the canadian based on certain benchmark, that makes it even harder to read. Folks can take a look at some of the comments we can gathered at sgfunds,chaunelnewsasia and wallstraits. The behavior of wallstraits have been interesting.
Selling of MIIF after holding it for only a while, that don’t give you ample confidence does it? Then again, their recent addition has turned out to be patchy as well.

A few questions that we asked ourselves comes to mind:
1. Does MIIF suffer from forex risk.
2. The fee structure brought abt by parent Macquarie selling its assets to MIIF is a drag on earnings
3. Cashflow that is hard to figure out to vague
4. Not much institutional demand due to it not being a temasek linked reit or div yielder.

I believe it is the aggregate of all these factors that causes the difference bet MIIF and other dividend yielders. When your cashflow is clearcut, it makes valuation easier, true value easier to get. Right now, I can only remember Vickers covering MIIF. Higher transparency can improve subscripticn and reduce its volatility. We hope the management does take Tanjm’s advice seriously.

He wants us to keep this info private so i shall post this private.

I met for an hour with MIIF management recently. Gregory Osborne and Robert Thorpe were present. Gavin Kerr (the incoming CEO) was also present as an observer. One of the motivations of the meeting may have been a desire to improve investor relations (and indirectly the share price – which influences their fees).

I am currently an investor in MIIF. I am relatively indifferent to the state of the short term share price of MIIF as I would regard lower prices as an opportunity to buy. Please do not regard this note as an inducement to buy or sell – I’m not trying to do anything in this direction. In my view, at the current prices, MIIF has a potential long term total return of about 12% with relative safety.

The following notes are prepared by me based on my own notes and memory. Any errors, misunderstanding of what was said, or miscommunication are definitely due to me. Please do not treat this as an official communication from or about MIIF. I do not guarantee anything – please take this note as is and do your own homework if necessary. Take what I say at YOUR OWN RISK.

Any additional comments by me or notes outside of what was discussed in the meeting are enclosed in [].

Please do not reproduce this text anywhere. If you must, please link to it from elsewhere. In particular, I would strongly object to your only reproducing a partial quote.

Macquarie Bank (MBL) and MIIF management
[In this section, please note that MBL and its infrastructure business has operated for 15 and 10 years respectively. So take the “history” part withthe necessary pinch of salt].

MBL and MIIF have to comply with the various regulators for the protection of investors. [In particular, MBL has multiple regulators (US, Aus, SG) todeal with, who may take an interest in MBL related activities even if the regulator is not directly involved].

Most importantly, MBL has been in business for some time. They certainly want their word to be important to and trusted by investors. In that sense, every time they do something they have to bear the larger business in mind. Many of the underlying funds of MIIF themselves have external shareholders and other regulators.

[I would treat this as an essentially self-regulatory mechanism for MBL and MIIF not to play too fast and loose with investors.]

Historically speaking, performance fees have been taken in script (shares) for all their funds. Certainly, any impact of performance fees on distributable income is an important input they have to consider if they ever want to take performance fees in cash.

They have taken the suggestion to be more clear, and accessible about management/performance fees and their calculations, including deficit calculations etc. I think this will be forthcoming.

Control over new acquisitions. Besides the need for investors to approve all new acquisitions, another control is the fact that there are 3 independent directors on the team who, with the assistance of a 3rd party advisor, get to evaluate any acquisition without any interference from MBL related parties or directors.

Transaction costs. One example brought up was the recent Tanquid transaction in which the transaction cost was >10% of the deal size. It was explained that over 50% of the cost was paid to independent 3rd parties for due diligence purposes (i.e. lawyers, valuers etc). They acknowledge that they could be clearer in differentiating the transaction costs. The independent directors mentioned above are also a point of control in managing transaction costs.

Use of derivatives or synthetic instruments to manage cash flow. Other than normal hedging to cover physical cash flow, they do not do anything to “manage” their cash flow.

Nature of Assets
Generally, before any acquisition is undertaken, they typically do a 20-30 year model of the business, including all possible expenses. Their valuation of the business to be purchased is based on this model. In other words, their model (at least within the 20-30 year period) takes into account any reasonably expected expenses [and interest rates, growth rates etc]. This has a bearing on the sustainability of the yield they project.[this portion was part of an answer to a question from me regarding interruptions to cash flow from capital expenses or other sources].

[They have released the analyst model spreadsheet to me. In that spreadsheet, they have projections up to as far as 2025 for leisureworld and 2031 forBrussels Airport for example]

Accounting rules generally require them to depreciate book value to zero within a certain period of time (e.g. 20 years) even though these assets may have useful life way beyond the time when their book value is reduced to zero. Many of their assets only need maintenance to carry on useful cash generating activity beyond their remaining book life. One example to use is the Leisureworld business. More on that below.

[I get the impression overall that they do not regard book value as important. Cash flow is more important.]

They generally acquire assets in which they expect the cash flow to gradually increase – barring any unexpected happenings. Even for risk to cash flow from debt, they are hedged to within several years against interest rate risks. As for renewal of debt, they do not anticipate other risks (such as decrease of credit standing) due to the nature of the businesses – i.e. they do not expect problems renewing debt other than those due to external market conditions over which they have no control.

[in other words, according to them, they generally expect cash flow earnings to be relatively stable and consistent and even to grow a little]

Accrual accounting and cash flows
Generally, I get the impression they think accrual accounting is not very appropriate for appreciating this type of business, though it is a regulatory requirement. i.e. the earnings statement may confuse people. They acknowledge they need to do better to communicate to help investors understand.

[They operate under rules which allow them to distribute available cash in excess of accounting earnings – which is similar to the way REITs andBusiness Trusts in SGX are regulated.]

See also the mention on depreciation in the previous section.

One suggestion given was that they publish a simple table or excel spreadsheet, showing the expected cash flows during the year (including from whom, when it is expected, worse and best cases). I think this was taken positively.*

One specific question raised was one that was first brought to my attention by tankie on the wallstraits forum (see this link). When raising funds for new equity, an “Offer Information Statement” dated 15th Nov 2005 was circulated. In it, the unconsolidated profit (ex. Non-recurring expenses, performance fees, and transaction costs) was published as 39.8 million. But the guidance was about 46 million dollars. It was explained that 39.8 million is based on accruals – income which has been declared by their assets. 46 million is based on their expectation of what they would receive. They can only include “declared” income in the profit forecast. A simple, illustrative example was given:

• Business owns 8 assets. 7 assets have declared their income.
• Business reports forecasted profits based on the 7 assets. But the expected cash flows would include the 8th asset.

Note that the suggestion given in the * paragraph of this section would help to resolve such issues.

Leisureworld Case Study
This was taken as a case study in order to look at in a little bit more detail. There is another thread in wallstraits forum which talks about leisureworld (see this link) in more detail. You may want to read it to understand this section better.

Book Value – why so small
A large part of their book value was under “intangibles” – CAN$37 million in net assets if you don’t include CAN$112 million in intangibles (bed licences, resident relationships, support contracts). The reported value of the 55% investment for MIIF is SGD165 million (i.e. the entire business is valued at about CAN$207 million).

2 relevant responses.

The intangibles represent long term contracts by the Canadian government to pay the business based on the occupied beds and activities on behalf of residents, of the business. While, in theory, these payments could vary, in practice (given aging population, unwillingness of government to increase beds unnecessarily) they are regarded as “practically guaranteed” [my words. The actual word used was “perpetual”. In other words, they do not regardthese contracts as being truly “intangible”]

Many of the physical assets are quite old, and their book value has already been largely written down by accounting treatment. However, in their view, these assets are still quite usable [see remarks earlier about depreciation] and represent value in excess of their reported book value [though inpractice, they can’t really easily realize these assets].

Cash Flow – why last years 2.5 mths was low
A significant part of the infrastructure of the business has been involved in upgrading works (no specific percentage was given at the meeting). Hence, the financial statements that were issued from mid Oct 2005 to end Dec 2005 may not reflect expected cash flows from the business going forward. [MIIF projects cash flow ex. fees from LW to be >11% of the invested value of SGD165million.]

It was suggested that MIIF organize their web page to include links to all the financial statements and other reports of their assets. This was taken positively.

It was suggested that MIIF include on their web page, the market prices of their listed assets. It was noted by me in passing that MIC and a couple of other assets (all listed in the US) they own actually had trading yields of 6-7% – well below MIIF’s current trading yield.