By Gareth Vaughan
The biggest concern overseas institutional investors have about investing in New Zealand companies is potential "regulatory drift" stemming from the previous Labour-led government's "left field or poorly communicated" moves on Telecom and Auckland International Airport, says Infratil CEO Marko Bogoievski.
Speaking to interest.co.nz after the infrastructure investor's annual investor day in Wellington last week, Bogoievski said staff from Infratil and its manager H.R.L Morrison & Co had held a couple of hundred meetings with overseas institutional - or professional - investors over the past 18 months as they strive to entice them to invest in Infratil.
"The biggest single thing out there still affecting offshore investors' impressions of New Zealand has got to do with regulatory drift," Bogoievski said.
"The overhang of the Telecom New Zealand debacle is still quite present in a lot of conversations you have in North America and Australia," Bogoievski, who was Telecom's chief financial officer in 2006 when the government's decision to open its fixed-line network to competitors knocked NZ$1.1 billion off the company's sharemarket capitalisation in a single day.
"I think that the general sense is there are other markets with less regulatory risk and higher growth. I think politicians have continually under estimated the impact of some of these historical decisions on our ability to access capital in the future," said Bogoievski.
"Telecom – it’s an example. The sort of decisions that have not been communicated well to offshore investors and have left a residue of concern. I think Auckland Airport was another good example where people have seen two marquee assets being impacted by decisions that came out of left field or were poorly communicated."
Bogoievski said it would probably take time to lift confidence again, but said the current National-led government's proposal to sell minority stakes in four state owned enterprises (SOE) - Meridian Energy, Mighty River Power, Genesis Energy and Solid Energy, as well as reduce its 76% stake in Air New Zealand, would help.
"They’re on the table and will act as a catalyst for offshore investors to take another look at New Zealand which is a fantastic thing. And most of those companies they’re talking about would hopefully make good investment stories," said Bogoievski, who added Infratil wasn't planning to make direct equity investments in any of the SOE sell downs.
'Finite' domestic equity and debt markets
The main issue with the domestic capital markets for Infratil, which has a market capitalisation of about NZ$1.2 billion and oversees assets worth about NZ$2.1 billion, is that they have a "certain finite feel" for both debt and equity.
"We aren’t a huge business in the context of say even Australasia yet we’re well represented in all key New Zealand institutions," said Bogoievski.. "We’re a well followed stock, we’ve got good analysts’ coverage, we’re generally market weight or better in some of these key institutions' (portfolios), and we’ve been quite active in the debt markets as well."
"(But) to get continued access to capital, in any material way, you’re probably going to have to tap offshore equity investors."
To this end Infratil listed on the Australian Stock Exchange last August. Its executives have also been "aggressively" marketing the business to overseas investors over the past 18 months.
"We've done a couple of 100 meetings of which half of them might have been initial introductions to the group, and half of them would’ve been people we knew directly or indirectly through previous roles," said Bogoievski.
"Within that we would have gone back to the ones who showed interest several times. It’s quite an active programme."
However, so far "very few" have invested in Infratil. Aside from a 20% stake owned by Sydney-based Duncan Saville's Utilico Investment Trust, about 5% of Infratil's shares are held by overseas institutional investors. Nonetheless, Bogoievski said he hoped this would rise to Telecom and Fletcher Building levels, of about 30%, over several years.
"I think that’s where we’re headed. I think what I like is the idea of diversity on the (share) register and it doesn’t have to be focused on Australia. I think at a minimum you’re looking at those sorts of levels (30%) before you can say you’ve got that real choice and diversity."
Infratil's last annual report shows the company had a combined 28,800 shareholders and bondholders as of March 31 last year.
External management model 'still okay when you deliver'
Meanwhile, Bogoievski acknowledged problems at other companies run by external managers such as Ron Brierley's Guinness Peat Group, listed property trusts such as the National Property Trust and Macquarie businesses and the way they'd been dealt with, had made it harder for Infratil and Morrison & Co, of which he is also CEO. But this was only really a problem were someone does a "superficial" analysis.
Morrison & Co received NZ$16.5 million in fees (excluding GST) for managing Infratil in the year to March 2010, down from NZ$18.7 million the previous year.
"Ultimately if you look at what the underlying causes were for problems in some of those companies, it’s more about the fact that they really didn’t have a coherent operating strategy and over time were quite poorly disciplined about their investment decisions, whether they were entering new positions or when they were prepared to sell them," Bogoievski said.
"And (they) typically used financial engineering rather than using active operating management to try to get their returns."
Some of these problems, such as over gearing, poor acquisition decisions and management incentives, were also present in internally managed companies. The question was really whether the team running a business was generating genuine growth in valuations and free cashflow and what their behaviour and track record showed.
"And on that front, thankfully, we’ve got something we’re proud of," Bogoievski said.
Infratil's annual report notes its goal is a 20% per annum return to shareholders after tax through capital appreciation and dividends over the long-term. It says it has produced a compound after tax return of 17.7% per annum since it was founded by Lloyd Morrison in 1994. The company says an investor who acquired NZ$100 of shares on April 1, 1994 when Infratil listed on the sharemarket, and had since reinvested all dividends and distributions, would have had a holding worth NZ$1,360 at March 31, 2010.
Infratil's assets include a 51% stake in TrustPower, Infratil Energy Australia, 66% of Wellington Airport, Infratil Airports Europe including the Glasgow Prestwick airport, NZ Bus, the Snapper payment card business, and the Shell petrol stations through joint ownership of Greenstone Energy with the New Zealand Superannuation Fund.
Still interested in Whenuapai airport
Infratil has also worked with the Waitakere City Council in an attempt to open Auckland’s Whenuapai air base to commercial flights. Bogoievski said Infratil was still interested in the potential development of Whenuapai but suggested the idea has "close to zero" momentum at the moment.
"Airports is a space we still like, broadly inside of the transport sector," said Bogoievski.
"The other stand alone sectors the company has actually got capability in and previously looked at and/or invested in are really ports (Infratil used to be a significant Port of Tauranga shareholder) and waste, which the company has had a close look at in the past and previously been an under bidder in some of those transactions."
He said Infratil and Morrison & Co had looked at both EnviroWaste and Waste Management when those firms had been on the block.
"They are quality assets, but it’s all about whether they could be acquired at a price that made sense," he said.
Infratil and Morrison & Co see the waste sector as an important infrastructure industry where owners have to both work closely with regional authorities and understand their needs.
"That sort of partnership model, I think, we’re good at and you can see growth and can see reinvestment potential."
Irrigation was another area of interest, Bogoievski added.
EnviroWaste is owned by Australian private equity group Ironbridge, which also owns TV3's parent MediaWorks, having bought it for about NZ$365 million from Fulton Hogan in a leveraged buyout in December 2006. Waste Management is owned by Australia's Transpacific Industries after an NZ$870 million takeover, also in 2006. Former Waste Management managing director Kim Ellis, who is Lloyd Morrison's cousin, now chairs EnviroWaste.
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