Macquarie Infrastructure Looks Like A Tricky Play

By Stephen D. Simpson, CFA | May 30, 2012 AAA

Savvy investors know to love those toll-booth companies out there--companies that own hard-to-replicate assets that produce quality cash flow streams and require little short-term strategic support. These companies can take many forms, from timberland owners like Weyerhaeuser (NYSE:WY) to petroleum transport and storage companies like Enbridge Energy Partners (NYSE:EEP) to diversified investment holding companies like Brookfield Infrastructure (NYSE:BIP).

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Macquarie Infrastructure Company LLC (NYSE:MIC) is a company worth exploring within that same theme. While there are cyclical and long-term structural issues with some of the company's operating assets, results have been getting better and the company's dividend paying ability seems to be getting stronger.

Four Very Different Businesses
MIC operates four different business units, with two of them compromising nearly 90% of the company's EBITDA.

The smaller businesses are The Gas Company (TGC) and District Energy. TGC not only operates the largest liquefied petroleum gas distribution business in Hawaii, but also the only utility gas pipeline business across the state. District Energy (which MIC holds just more than 50% of) is in the business of providing chilled water to run building cooling systems in Chicago and Las Vegas.

Second in importance is Atlantic Aviation - the largest airport services provider to business and private jets in the United States. Atlantic operates at over 60 airports, providing refueling, terminal and hanger services to private jets.

Last and not least, MIC owns 50% of International-Matex Tank Terminals - a petroleum storage company with operations at 10 marine terminals, including New York Harbor.

Will the Good Days of Private Aviation Ever Come Back?
Not surprisingly, MIC's Atlantic Aviation business saw a sharp decline in business during the recession. Unfortunately, while conditions have certainly improved, it's unclear whether this is really going to be the kind of business it once was. Private aircraft builders like General Dynamics (NYSE:GD) and Bombardier (OTCBB:BDRBF) are seeing better trends in their business, but shareholder activities have put a huge amount of scrutiny on the use of private aircraft, and even operators like Berkshire Hathaway's (NYSE:BRK.A) NetJets have continued to struggle.

SEE: The Biggest Corporate Image Catastrophes

IMTT Should be a Cash Cow
There's little question that IMTT (the storage business) is the crown jewel at MIC. Yes, the airport service business may get better, but the petroleum storage business is already doing well and market conditions suggest multiple years of strong cash production. While companies like Kinder Morgan (NYSE:KMP) and Cheniere Energy Partners (AMEX:CQP) are looking to add capacity, most available storage is booked up and rates are rising. What's more, there is only so much deepwater-accessible real estate out there for competing terminals and facilities.

The Bottom Line
While MIC may look overburdened with debt, investors should look a little closer and recognize that meaningful amounts of MIC's debts are non-recourse. That doesn't mean that the company is free to throw around cash and acquire more assets, but the company's liquidity situation is better than it may seem at first glance.

Considering the long-run, I think MIC management probably does need to consider changing up its asset base and keeping its eyes open with respect to new capital allocation opportunities. That may be particularly true in a low interest rate environment like today.

I don't necessarily love MIC's asset base, and I would personally prefer other investment options like Brookfield Asset Management (NYSE:BAM), Brookfield Infrastructure, as well as various foreign holding companies and pure-play partnerships like Energy Transfer Equity (NYSE:ETE). That said, MIC is not overpriced today, there is the potential of an improving aircraft services market, and the company should be in position to improve its dividend payout over the next couple of years.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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