Portfolio Talk: Lloyd Morrison
Infratil manager Lloyd Morrison talks to Ann Cunninghame about the future of the listed investment company.
Monday, February 21st 2000, 12:00AM
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Portfolio Talk |
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Lloyd Morrison |
Mkt cap $ |
Description Infratil NZ Ltd (Infrastructure & Utilities NZ Limited), is an investment company listed on the New Zealand Stock Exchange. It was set up in 1994 to invest in the country's infrastructure and utility assets. |
Key investments TrustPower........25.78% Infratil is not rated by the managed fund research houses |
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Discount: Sharebrokers estimate Infratil is trading at a discount of between 30% and 40% of NAV |
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Average annual return since listing 25% |
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Benchmark NZSE 40 has done 6% over the same period |
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Infratil is managed by HRL Morrison & Co |
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Infratil NZ (Infrastructure & Utilities NZ Limited), an investment company listed on the New Zealand Stock Exchange, was set up in 1994 to invest in the country's infrastructure and utility assets. Its long-term objectives are to acquire and manage a portfolio of investments which individual investors would find it hard to buy and in which the company can acquire a strategic shareholding. It also aims to maximise overall post-tax returns derived from capital growth and to develop a high quality income stream.
Lloyd Morrison is the executive chairman of HRL Morrison & Co, which is responsible for managing Infratil NZ, Infratil Australia and Utilico International. Australian manager Lend Lease last year bought a stake in HRL Morrison.
Infratil, while is a listed trust which gives investors exposure to property and infrastructure assets. There are several unlisted unit trusts which also offer exposure to this sector.
Lloyd Morrison isn't at all keen to have Infratil mentioned in the same breath as listed investment trusts or "portfolio-type players". He shies away from identifying a net asset backing for Infratil shares (although at least one sharebroker hassles him regularly on this point) and says the company has absolutely no diversification strategy whatsoever.
However, the fact remains that Infratil's strong track record and strategic shareholdings - not to mention its bargain shareprice - continue to prompt a number of sharebrokers who actively research the company to give it a buy/accumulate rating.
"There's a criticism of Infratil at times that anyone can do it," Morrison says. " That, in itself, is a crude analysis. The substance of what we're doing is trying to buy and run a few levels of expertise."
Have you achieved what you had hoped to in Infratil's first five years in business?
Probably no, but it's not bad what we have achieved. What Infratil has done is to establish itself as a reputable player in the sector and to establish its credibility: six years ago, the name didn't exist. Most importantly, it's delivered a good return to shareholders.
It's a long return game, which can be frustrating as the market is so short-term focussed. But I generally think a long way out and don't get transfixed by short-term objectives.
How would you characterise Infratil's business?
Looking at infrastructure, there are two types that we see in most OECD economies. The first is a function of wealth, generally owned by government and generally driven by the wrong incentives. The second you see in Asia and in developing countries, where what happens is that their economic growth tends to outstrip their infrastructure - that's seen as new project-type business. However, we're interested in the first kind.
Worldwide, two things tend to happen. One is to make businesses more efficient and, in that process, there are gains for people who know how (to do that). New Zealanders tend to be ahead here, and Infratil and Morrison & Co have also been playing the game a little longer than others.
Secondly, governments are seeing that, unless they provide a regulatory framework that rewards winners and penalises inefficiency, they're not going to get proper allocation of capital. It's becoming apparent that New Zealand spent money poorly (on infrastructure development) because we were rich and, as money becomes scarce, the deficiencies have started to show through.
So what value can Infratil add for investors?
The substance of what we're doing is trying to buy and run a few levels of expertise. We have no diversification policy at all and we're not necessarily trying to buy, in a pure sense, the best assets. It's a function of being in the right place to start with and developing that expertise. Starting in New Zealand has been an advantage - for example, the most efficient and biggest market is the US and there are no private airports there.
Instead of being financiers, we try to get people who are very smart in the industries themselves and then train them. Around 70 per cent of our employees these days have non-financial backgrounds.
For example, Bruce Harker is the head of our electrical team and has a background as an electrical engineer in Australia, New Zealand and the UK. He now has an understanding of investment criteria, valuation and finance that is streets ahead of many financial analysts, and he can overlay that with an intimate understanding of the industry. The head of our airports group, Phil Walker, used to be CEO of the Brisbane Airport and before that worked many years at Qantas.
We employ the top people and it has a cumulative effect, as they then attract more skilled people to work here. We currently have 70 executives round the world (the Australian operation is actually bigger than New Zealand). The interface is sectoral: for example, for Southern Hydro in Australia, Bruce (Harker) is the chairman but he's based in Wellington. Whereas Phil Walker, who is based in Brisbane, is chairman of Wellington Airport.
What effect is the change of government likely to have on your business?
No matter what government is involved, the process of change (in the industry) will continue to take place. Foreign investors are less interested in New Zealand than they were so the pricing of assets, and also of Infratil itself, will reflect that.
On the negative side, there are aspects of their policy which are head-in-the-sand. The obvious thing is that it's a silly concept to retain ownership of the three electricity SOEs. It's a high-risk business and the Government will find it very difficult to manage that. Risks in the electricity industry that weren't there before may come to bear. There are some drastic examples of this in Australia, where the Government wrote off hundreds of millions of dollars as trading risks (see details below), and the same thing could happen in New Zealand.
One of the best examples is that you could do a survey in Tauranga and ask, "Do you think the Government should sell its electricity assets?" and 80 per cent would say no. Then you'd ask whether they're satisfied with the service from TrustPower, and we know that the level of customer satisfaction (with that company) is enormous. There's a real education issue (about asset sales). How many people have heard of Genesis, Mighty River Power, Meridian? There's a level of ignorance which is dangerous.
Take the regulation of telecoms. The critical thing about Telecom is that it may not be in the business in five years' time. There's no point regulating competition nationally and internationally; given the impact of Internet, it's far from clear what that means for Telecom. And if Telecom fails as a public company, then maybe you can kiss goodbye to the New Zealand sharemarket.
Disclosure: the writer owns shares in Infratil
In Australia, huge losses have been suffered by State-owned electricity utilities and the figures are expected to climb. Before Christmas, a Victorian Supreme Court ruling went against NSW State-owned generator Pacific Power over a number of electrical hedging contracts held with a Victoria-based power distributor totalling more than $A600 million. Meanwhile, another State-owned energy distributor, Integral Energy, said that inadequate risk management practices had contributed to energy trading losses of some $A50 million in 1998/99.
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