Morrison's amazing levitation act

By Shoeshine

Thursday 5th February 2004

Infratil boss Lloyd Morrison can hardly be described as a retiring fellow - his dress sense wins awards and his Wellington parties are legendary - but he avoids media exposure as best he can.

The National Business Review has more or less given up asking him to illuminate his annual Rich List entry. This year his wealth will be expanded by the exercise of 1.5 million Infratil warrants at a profit of $1.40 each.

Rather more will be added by the near-vertical climb in the price of Infratil's head shares, of which Morrison's Hettinger Nominees owns, according to the last annual report, 15.3 million or 8.4%.

The shares have shot from a low of $1.54 last March to $2.80. That's still a long way below net asset value, which sharebroker Goldman Sachs JB Were calculates at $3.37.

With the exception of a 7.2% holding in Tranz Rail, on which Infratil booked a modest profit on sale after writing it down heavily, the company has had a superb year.

This week's results for the first three quarters showed the profit before investment realisations rose from $5 million a year ago to $18.3 million.

This year's crop of sales, mostly Tranz Rail, were $2.5 million, compared with the bumper $33.4 million in the first nine months of 2002.

Most of the lift came from big rises in the contribution from Infratil's two biggest investments, TrustPower and Wellington International Airport.

Infratil's equity-accounted share of TrustPower's profit was $17.5 million, up from $11 million a year ago.

It actually got $19.1 million in TrustPower dividends so had to book a $1.6 million adjustment further evidence, Sir Ron Brierley would argue, of the absurdity of equity accounting.

The value of the 28% TrustPower stake has risen from $216 million a year ago to $354 million as a result of the run-up in TrustPower's own share price.

Also benefiting from an improved share price was the 20% stake in Port of Tauranga, whose book value has risen $5 million to $58 million.

Even the accident-prone Energy Developments improved. The market value of Infratil's 14.8 million shares has risen from about $A1.50 to $A2.50, resulting in a $12 million markup in the stake's value.

Wellington International Airport, of course, had plenty to celebrate.

The company hiked airfield activity charges by 28% last February, to howls of outrage from airlines, but still won a government decision in May not to impose price controls. As a result Wellington Airport's operating earnings rose 55% to $29.3 million. Infratil's share was $13.6 million, up from just $4.8 million a year earlier.

The airport's prospects received a further boost in December when Virgin's Pacific Blue started operations.

With the addition of Air New Zealand's transtasman Express service, Infratil reckons Tasman capacity out of Wellington has grown 35%.

For some reason this didn't persuade the company to bump up Wellington Airport's valuation in the accounts but that could come at the full year.

In the meantime there are a few issues that will be exercising shareholders' minds.

First, how much more upside is there in TrustPower?

In the first three quarters TrustPower's earnings pre-abnormals rose by 16%, mostly because the power supplier was able to hike prices.

The industry is warning there is more to come as the country looks forward to a less plentiful energy supply post-Maui. But the power companies can't keep hiking prices without attracting the attention of our regulatory-minded government.

Second, how good a prospect is the proposed second Auckland airport at Whenuapai?

If Infratil's arguments for it are successful it will be committed to investing about $50 million just short of the amount that will be raised by the warrants' final conversion date of March 31.

Lastly, the jury is still out on Infratil's third-largest investment, Glasgow Prestwick International Airport.

For the December nine months Infratil accounted a 67.3% holding with a book value of $124 million. This produced a net profit of only £1.3 million ($3.4 million), a skinny return on such a large slice of Infratil's assets.

A further 10% has been bought from Omniport for $16.3 million. If shareholders approve a meeting is scheduled for March a further $32 million will be ploughed in, taking Infratil's stake to 100%. All other things being equal that will take the value of Infratil's investment in Glasgow Prestwick Airport to $156 million. But the returns, put next to Wellington Airport and TrustPower, look very meagre.

Two schools of thought are possible on this one.

The first, and stronger of the two, rests on Infratil's track record. Anybody who was smart, or lucky, enough to have bought the shares when they were listed in 1994 would have made world-class returns.

So why not follow Lloyd and the boys, come what may? The rationale for investing in TrustPower or Wellington Airport may not have been crystal-clear when Infratil first went in but it has certainly proved sound in hindsight.

The counter-argument acknowledges the overseas investment black hole, which has sucked in billions of dollars of New Zealanders' wealth.

For the company to make such a big bet on an airport in Scotland has got to worry its shareholders.

Infratil's exceptional, for New Zealand, track record has been built entirely on the local knowledge and expertise of the managers Morrison employs. The international vehicle, Utilico, was nothing short of a disaster.

It's impossible to say for sure, but uncertainty about these things surely go a long way toward explaining why Infratil's shares trade so far below the value of its assets.

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