Anyone reading Friday’s post about Jim Chanos proving me wrong will have noticed the ensuing debate about the merits, or lack thereof, of Macquarie refusing to value its assets at market value. Whatever you think of Macquarie Group’s accounting principles, the situation in its infrastructure funds is several degrees worse. Consider this little example.
Copenhagen Airports owns two airports, Denmark’s main airline hub located 8km south of Copenhagen, and a smaller regional airport in Roskilde, host to one of Europe’s most popular music festivals.
The company is 53.4% owned by Macquarie Airports Copenhagen, 39.2% owned by the Danish Government and the remainder of the shares are listed on the Danish Stock Exchange. The shares traded last week at a price of 729 Danish Kroner (DKK), giving it a market capitalisation of DKK5.7bn (about $1.6bn).
If all of the shares are worth DKK5.7bn, then the Macquarie-related 53% must, according to the Danish stock market, be worth DKK3.1bn. Unfortunately, there is a slight problem with that somewhat logical conclusion: Macquarie Airports Copenhagen has a loan of DKK5.1bn against its investment. If the stock market value is the real value, not only is the equity in Macquarie Copenhagen worth nothing, but the lenders are underwater to the tune of a couple of billion Kroner.
Macquarie Airports (MAp), listed on the Australian Stock Exchange, owns half of Macquarie Copenhagen (the other half was sold to unlisted Macquarie funds last year). MAp’s board of directors doesn’t think its investment is worth nothing. In fact, they have its half stake on their balance sheet valued at $1.1bn, or DKK3.8bn.
They therefore think the full equity is worth DKK7.6bn and the whole of Macquarie Copenhagen DKK12.7bn (including its DKK5.1bn of debt). It’s an extraordinary difference of opinion. MAp’s directors think 53% of the airport is worth twice as much as the current market value for the entire company.
Someone, or everyone, has clearly lost their marbles.
For the record, the shares listed on the Danish stock exchange look exceptionally cheap. The airport has its troubles. One of its biggest customers, Sterling Airlines, went bust in October last year. And Scandinavian carrier SAS, which alone accounts for 46% of Copenhagen’s revenue, is in the middle of an emergency capital raising in an attempt to stave off bankruptcy.
But the company still made DKK1.0bn in 2008, which was 24% down on the previous year but in line with the average since 2004. That puts it on a PER of 5.7. Its own debt burden (separate from the Macquarie Copenhagen debt) is relatively small – interest on the DKK3.1bn debt is covered more than 7 times by pre-tax earnings – which means it is well placed to deal with difficult economic conditions. And, even if SAS joins Ansett in the increasingly crowded hanger for failed airlines, another carrier is likely to pick up the slack. Copenhagen is, after all, a beautiful city that people want to visit.
If you’re looking for exposure to the Danish Kroner, this looks like a very sensible place to park your cash. But what to make of MAp’s valuation?
Useless. That’s about the only way to describe it. It is a bizzare set of accounting principles that allows the directors of a listed company to ‘value’ their assets every year and report the difference as profit or loss. The accounts provide investors with none of the information they need to value the business themselves – revenue, margins, assets and the like – but simply expect us to have faith in the directors’ numbers. We’re not even told what the underlying earnings and future growth assumptions are – that would at least allow us to perform some reasonableness tests.
Fortunately both Copenhagen and Sydney Airport publish accounts of their own, so the MAp jigsaw puzzle can be put together reasonably well. But the accounting standards need to be changed so that these infrastructure funds can be properly analysed from their own audited accounts. As it stands, the annual reports aren’t worth the paper they’re printed on.