We met with the management of MIIF for a company update. Based on the reduced dividend guidance of 3 cts per unit for 2H08, the trading yield is attractive at 10.5% and downside is limited given that MIIF is currently trading close to the all-time low of $0.255.

MIIF paid a 4.25 cts dividend in 1H08 and has lowered the guidance for 2H08 to 3 cts in the 3Q08 results announcement. The dividend reduction is to generate additional cash for a full repayment of its corporate-level debt by Dec-2009, even though the debt facilities mature only in 2011. To date, only $27.5m out of the total $440m in corporate debt facilities has been drawn down. The management has set a limit of S$60m as the maximum drawdown for FY09, if borrowing is necessary. We estimate cash savings from a reduced payout to be about $32.4m in FY09 (which covers the $27.5m), assuming the same operating income level as the previous year.

The shareholdings of the top 20 shareholders have been stable, except for The Capital Group Companies, which currently holds about 64m shares (4.95% of shares outstanding) after selling 13.7m shares at the beginning of 2009. We observed a strong resistance at the $0.30, implying an exit by the shareholder at that level. The stock could be stable infrastructure play once the overhang is removed, as retail shareholders hold a substantial 36.1% of the shares.

The manager of MIIF has initiated a series of corporate actions aimed at generating additional cash and shareholder value. Firstly, other than the 2H08 dividend reduction, management fees will be taken in scrip until Dec-09. Secondly, they are seeking approval for a share-buyback mandate by Apr-09. Thirdly, the appointment of Mr Nick van Gelder as the Director of the manager (MIMAL) to replace Mr Gavin Kerr is also move toward better cost management. Lastly, subject to the availability of surplus cash after debt repayment in FY09 and sale of assets outside of Asia, the manager will consider paying special dividends.

The underlying businesses of MIIF put up a solid performance in 3Q08, with net income up 20.4% due to higher investment income from assets acquired in FY07, and lower management fees and financing costs. Recurring operating income is expected to remain stable in FY09 as MIIF’s investments are all unlisted entities, which removes earnings volatility. Currently, only 43% of MIIF’s investment is in Asia. MIIF hopes to shift a greater proportion of its asset base to Asia over the mid-to-long term. Sale of non-Asian assets is a potential catalyst as sales proceeds can be used for special dividends distribution.