The head of Macquarie Group’s flagship infrastructure fund, John Hughes, has lashed out at a rival investment bank for conspiring to drive down the share price of Macquarie Infrastructure Group amid growing tension about the relationship between research ana lysts and their hedge fund clients. Mr Hughes used a spirited defence of the $5 billion global toll road group — whose shares are trading well below the value of its assets — to accuse Morgan Stanley of having a vested interest in putting out brokerage reports at a time when hedge funds have been targeting Macquarie Group and its listed infrastructure satellite in record numbers. Broker research has become the source of serious animosity among rival investment banks this week after Macquarie Group shares slumped to their lowest level in almost four years following a UBS analyst cutting his share price target from $60 to $48 due to concerns about the global credit crunch.
Macquarie Group and many of its listed funds have been engaged in Fierce battle with hedge funds for most of this year — a skirmish that has gained wore prominence following the upheaval at Babcock & Brown and Allco Finance Group — with recent data suggesting that about 19 per cent of the parent and roughly 8 per cent of Macquarie Infrastructure is on loan to short sellers. The decision by UBS to downgrade Macquarie Group on Wednesday caused an inevitable stir and raised long-standing issues tied to the magnitude of fees Macquarie Group distributes to investment banks through its extensive market activities. The UBS report was followed up by more bullish research from Citigroup. which claimed that balance sheet risk had been “overplayed”, and JPMorgan analyst Brian Johnson, who gave the ‘ an “overweight” recommendation and a share price targetof $72.83 — almosttwice yesterday’s closing price of $42.08.
Mr Hughes, whose comments were made separately to the issues surrounding the fund’s parent, said that Macquarie Infrastructure units were sold off late last week following suggestions from “one broking desk” that “we were going to run out of cash in the short term and we were going to have to cut distributions next year”. “It is clearly fiction — these guys make a story up because they need a sell story to give their clients,” he said. “And that’s what’s driving the sentiment. We have a huge wall of money, or shorting sentiment, coming through.” Mr Hughes was referring to Morgan Stanley research compiled by analyst Philip Wensley, who has had an underweight rating on the shares since June.
“We believe MIG is running out of options to support an ailing secunty price,’’ Mr Wensley wrote after Macquarie Infrastructure posted its results.“We are also concerned about financial engineering, such as distribution manipnlation and the use of interest-rate swaps.’’ MrWensley’s $1.85 share price valuation is in stark contrast with some other analysts, including Deutsche Bank at $3.50, Merrill Lynch at $3 and UBS at $3.49. The stock fell 15 per cent in the two days after Mr Hughes used the full-year results to announce an on- market buy-back and the sate of Macquarie Infrastructure’s 50 per cent interest in the Westlink M7 toll- road as measures to improve shareholder returns and narrow the discount between its stock price (which last traded at $2.12) and its net asset backing ($3.84).Morgan Stanley dominated trading in Macquarie Infrastructure since the result, accounting for 19 per cent of trade by value.
Monthly activity figures show the US investment bank traded 16 percent of the fund with a ‘net sold” position of $13 million after buying $57 million and selling $71 million through its desks, Morgan Stanley Australia’s head of equities Ian Chambers said the firm “has apolicy of not commenting on client activity”, when contacted by The Australian Financial Review yesterday.
“The volume of sales being driven by Morgan Stanley in this last week is enormous and I can assure it is one side only,’’ Mr Hughes said. “We are dealing with someone who has a vested interest in putting out brokerage reports along a certain path.”
While Macquarie Group has moved to protect its flagship fund this year by spending $497 million, increasing its stake from 8.7 per cent to 16.2 per cent, Macquarie Infrastructure units have slumped 35 per cent over the past 12 months. Last week the fund reported animal results showing an 8.3 per cent increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to $834 million for the 12 months ended June30 and confirmed distribution guidance at 20c a share for the 2009 financial year. The company stated that between 55 per cent and 65 per cent of that distribution would be funded by “proportionate earnings”, however Mr Hughes was adamant that the fund didn’t borrow to cover its dividend. “We don’t pay distributions out of borrowings,” he said. Traffic results have been mixed for the fund over the year-to-date and assets such as the M6 Toll in the United Kingdom, and the Indiana Toll Road and Dulles Greenway in the United States, all posted declining average daily traffic.
“We have a strong portfolio,” Mr Hughes said. “It’s going to be a flat year in terms of traffic in the northern hemisphere for some of the assets and we will see revenue growth, EBITDA growth and cost minimisationnext year — we are going to have a good portfolio performance next year.” Macquarie Infrastructure has $9.4 billion of debt compared with its enterprise value of $18.6 billion, but its gearing isn’t regarded as high compared with the bulk of the infrastructure and utilities sector. Performance aside, the company insists its balance sheet is in good shape and Mr Hughes said there was no need to change “the model”, in which the fund is managed externally by Macquarie Group, which also appoints the chairman.
Allan Moss "The Smartest Guy in the room" or The luckiest guy on the planet, timing is everything.
Nicholas Moore must be thinking what have I taken on " Not the Smartest Guy in the room ?
Time will tell.
MQG Price at posting:
0.0¢ Sentiment: None Disclosure: Held
(20min delay)