Takeaway: We added MIC to Investing Ideas on the short side on 2/3.

Stock Report: Macquarie Infrastructure Corp (MIC) - HE MIC table 02 13 17

THE HEDGEYE EDGE

MIC’s businesses are mediocre, with a combined pre-tax ROIC of 10%.

  • IMTT has limited growth opportunities and pricing power has faded. IMTT faces a new competitor in Louisiana starting in summer 2017 which may pressure its pricing and utilization.
  • Atlantic Aviation’s roll-up strategy may not create value given current M&A valuations, and we see little evidence of network effects. 
  • BEC is a merchant power facility; spark spreads and capacity prices are weak. 
  • Hawaii Gas is likely a dying business given the state’s aggressive push to renewables.

And this haphazard collection of businesses is externally-managed, adding a layer of management fees, ~$70MM p.a. at the current market cap, which MIC adds back to all non-GAAP measures. 

INTERMEDIATE TERM (TREND)

First off, there is a massive discrepancy between what MIC calls “free cash flow” and MIC’s actual free cash flow.  MIC’s “self-help” tailwinds of the last 5 years are unlikely to be repeated over the next 5 (price increases at IMTT, maintenance CapEx and OpEx cuts at IMTT and Atlantic, and the refinancing of higher-cost debt). 

MIC’s businesses are cyclical and are near peak margins. Outside of BEC II, the Company has few organic growth opportunities.  We don’t believe that the Company’s “FCF” growth target of 10 – 15% is achievable over the next few years.

LONG TERM (TAIL)

We value MIC between $35 - $50 per share using DCF (7.0% WACC) and SOTP methods.  Most other MIC analysts value the Company with some yield-based framework, which we believe is lazy and ill-advised.  Valuing a highly-leveraged, cyclical business by capitalizing a return-of-capital dividend is a portfolio disaster waiting to happen!

ONE-YEAR TRAILING CHART

Stock Report: Macquarie Infrastructure Corp (MIC) - HE MIC chart 02 13 17