Report Card: Infratil kicks up its heels and its values

By David McEwen

Friday 19th July 2002

Utility investor Infratil is proud of its achievements and justifiably so. Its latest annual report shows returns to shareholders through dividends (if reinvested) and capital growth have been 21.9% over the past eight years.

Another measurement it favours, net asset backing, is more open to interpretation.

Prominent references include a graph showing the company's net assets per share have more than tripled since it floated in 1994. It also lists as a highlight that shareholders' funds before outside equity interests increased to $319.97 million from $161.72 million a year earlier.

For one asset in the past year, this value appears to have been added by taking a number and roughly doubling it.

Infratil's balance sheet shows total equity jumped from $223 million last year to $420 million. Total assets rose from $613 million to $797 million, meaning Infratil's equity ratio has risen from an acceptable 36% to a strong 53%.

This could be seen as a prudent move since the company has moved away from a passive infrastructure investment style to become an active investor with a penchant for venture capital projects.

Shareholders' capital was virtually unchanged at $122.3 million. The big difference came in its retained earnings and revaluation reserves. One significant item was a gain of $58 million after Infratil recognised 28%-owned Trustpower as an associate and equity accounted previous earnings.

The other major boost resulted from the revaluation of its stake in Glasgow Prestwick International Airport, which it bought with other partners in January last year. Although the airport made only £600,000 million in profit, the value of its fixed assets rose from £36.2 million to £64.9 million pounds, "resulting in a $63.9 million valuation increase to Infratil," the report notes.

It also says Glasgow Prestwick's directors undertook the new valuation. There are six directors, all of whom represent the purchasing consortium. There is no reference to an independent valuation being carried out.

The Infratil report says of the revaluation: "This is a sizable increase and reflects both the price that Infratil and its partners paid for the airport [which effectively determined the previous value] and developments that have occurred since acquisition."

That seems to suggest no independent appraisal was carried out when the asset was purchased either.

The value-adding "developments" appear to be an increase in expectations for passenger numbers, per capita sales and property income. Valuing assets based on expectations for the future is all very well - until the unexpected happens and hoped-for incomes do not eventuate. Until these improved earnings are banked, some shareholders may decide to take this valuation and therefore the underlying value of their Infratil shares with a pinch of salt.

Compliments are due to the company for prominently disclosing how and why it has achieved these balance sheet enhancements, and for changes arising from its reinvention as an active investor.

The change of direction began last year and chairman Kevin O'Connor warns shareholders that an increasingly activity approach will require higher fees for manager Morrison & Co.

"The core issue is that Infratil's wider investment horizons means increased commitment from its manager and this must be paid for in an appropriate way," he says.

The manager already earns millions of dollars a year, some of which is performance-based, but shareholders will get to vote on any new package.

As Mr O'Connor points out, "If Infratil employed its own staff, such a development would occur incrementally in the normal course of business. Because Infratil is managed under contract, such changes require explicit expression in the contracted management terms. This is one of the particular benefits of the contract approach."

On the whole, the Infratil report is a good example of its kind. It is attractive without being a slave to design. It offers a good balance in the quantity of information disclosed using straight language rather than marketing spin.

Infratil has given fair warning that it is no longer the staid utilities investor of yesteryear. Investors should scrutinise its activities carefully to make sure that returns match the risks being taken.

Considering the company's excellent returns in the past from very low-risk assets, that will be an impressive achievement.

David McEwen is an investment adviser and author of weekly sharemarket newsletter McEwen's Investment Report. Web: www.mcewen.co.nz, email: davidm@mcewen.co.nz

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