Macquarie Infrastructure (MIC) Post-Dividend Cut

Macquarie Infrastructure eliminated its dividend yesterday.
Shares are now undervalued by at least 50%.
The company owns real assets that generate real cash flows.

Macquarie Infrastructure (MIC) eliminated its dividend yesterday, sending the shares down sharply today. The shares closed down 24% at $18.25.

Interestingly, even after the post-dividend-cut run for the exits, the shares are still 46% above their March panic lows.

While I’m disappointed to see MIC slash the dividend, I understand their reasoning for doing so. No one knows how long quarantine conditions will last or how long it will be until life returns to something resembling normal. Hoarding cash isn’t an irrational strategy here.

Last month I did a quick and dirty look at Macquarie Infrastructure, noting that “The biggest risk to MIC shareholders is that the dividend gets reduced or eliminated for a couple quarters. That happened during the 2008 meltdown, and it could easily happen again. But the underlying infrastructure assets are solid and, once life more or less returns to normal, will be back in demand.”

I noted that even if the company’s aviation business went to zero — which is ridiculous — the stock was still worth at least $22 per share. That hasn’t changed post dividend. Adding any sensible value for its other businesses gets you a conservative value north of $40 per share.

At any rate, Jeff Middleswart of Behind the Numbers published a report on MIC drawing similar conclusions. Some of Jeff’s conclusions:

We initiate coverage of MIC with a BUY recommendation as we continue looking for more potential bargains from the sell-off wreckage. This is an infrastructure company that normally has very stable to growing cash flows, but it will be impacted by coronavirus in two of the three units. MIC has also been looking to unlock shareholder value by selling the entire company as a whole or in pieces. We believe the two units hurt by coronavirus will recover and trade on the normalized results. We believe the sum of the parts could be $43-$49 per share vs. the current price that is bouncing around the high teens to $22…

There are two issues looking at the dividend in the short-term. First, the company is in the middle of its heaviest year of planned growth capital spending. It was already planning to boost its net leverage by spending cash on hand to offset the impact of that growth investment. Second, the company wants to keep leverage under 4.5x EBITDA. The operating units were forecast to grow EBITDA and 1Q was shaping up well to offset net leverage rising via lower cash levels. Now, as 2Q and 3Q are impacted by the economy being turned off – not only is net debt increasing, EBITDA will be falling and driving up the ratio much faster. Retaining cash from the dividend offsets that problem.

We believe MIC will restore a smaller dividend later this year.

Behind the Numbers, April 3, 2020

Charles here. I agree that the company should be able to reinstate its dividend later this year. I also think it’s very possible they will opt to retain the cash instead since they are planning to sell the assets anyway to unlock value.

Either way, it’s not unreasonable to expect the shares to double from current levels and likely do a lot better than that. These are real assets supported by real cash flows. The economy doesn’t go to zero. This panic will end, whether that day comes in weeks or (more likely at this point) months. And when it does, cash flowing infrastructure assets will start to look good again.