"The valuations in our opinion are crazy."
August 22, 2006
Stephen Long (transcript)
Australian Broadcasting Corporation
TONY EASTLEY: Macquarie Bank's bosses have made millions by buying and running toll roads and airports and it's the world's biggest name in infrastructure.
But there are questions about whether its pioneering model for financing these assets is sustainable.
Investor groups are shunning the key tollways business and they've told the Lateline Business TV program they don't like the big levels of debt.
Economics Correspondent Stephen Long reports.
STEPHEN LONG: Whether you're flying or driving, Macquarie takes its toll in Sydney and around the world. And its pioneering model has become the modern way to finance infrastructure.
But now there're a chorus of voices questioning the model, at least as it's applied at Macquarie's key tollways company.
ROGER MONTGOMERY: It's always been my view that the model is unsustainable.
STEVE JOHNSON: If you look at some of the valuations in mixed portfolio, the valuations in our opinion are crazy.
STEPHEN LONG: That's Steve Johnson, an ex-Macquarie Bank staffer who runs The Intelligent Investor.
And before that, Roger Montgomery of Clime Asset Management .
They told ABC TV's Lateline Business program they don't like the high levels of debt at Macquarie Infrastructure Group.
And Roger Montgomery is concerned because most of the payments it makes to investors come from borrowed money.
ROGER MONTGOMERY: The world is only a finite size. You can't keep growing forever and you can't keep debt funding those distributions forever, so it ultimately is not sustainable.
These infrastructure plays have actually broken the nexus for the investor between what the business does and what it actually generates and what they receive.
STEPHEN LONG: Macquarie's tollways cost it billions and at this stage they don't generate much free cash flow.
But it's found a way to make them attractive to investors: it borrows against the rising value of the roads and pays out big dividends, or distributions, on the expectation of cash to come.
And that's fine as long as Macquarie's got the valuations right, but it's all a little too risky for the high profile fund manager Peter Morgan.
PETER MORGAN: Well front-lining the profits is perhaps a little bit aggressive, but what a lot of the vehicles have done is that they've taken revaluations early on in the piece with regards to the asset, which is fine when interest rates and other variables are working your way. But it's when interest rates start to rise and other variables start to move that revaluation effect won't be that great if it's there at all.
STEPHEN LONG: Steve Johnson used to crunch just these kinds of numbers at Macquarie Bank, and he's very sceptical.
STEVE JOHNSON: When we do some valuations ourselves of those assets, we don't get numbers that are anywhere near as high as what Macquarie Bank gets and therefore we do think that the current price is well above what we think those assets are actually worth.
STEPHEN LONG: But most stockbroking analysts think the tollways business is a road to riches, among them Andrew Chambers of Austock Securities.
ANDREW CHAMBERS: We think it's one of the best opportunities in the infrastructure sector at the moment.
He says that if inflation drives up interest rates, Macquarie's tollways business should profit, because it can put up its tolls by the rate of inflation, or more.
ANDREW CHAMBERS: On some of the roads they've got market-based tolls, which means they can put them up to basically any price they choose.
And in the US, cash-strapped governments have been selling Macquarie tollways on some pretty favourable terms, including very long leases and clauses that stop governments from upgrading public roads that could take traffic off the tollway.
So there's no denying it's got some good assets. But to Steve Johnson, that's not the issue.
STEVE JOHNSON: Everyone says infrastructure is very, very safe. Sure, the assets are safe, but people need to understand that the amount of financial leverage employed makes it less safe.
You'd be a game person to say that it's going to blow up over the next year or so, but it is a risk that people should be aware of.
TONY EASTLEY: Steve Johnson of the Intelligent Investors ending Stephen Long's report.
© 2006 Australian Broadcasting Corporation: