16 December 2020

    Dear Infratil shareholder

    Let's play a game

    This article first was first published on BusinessDesk

    Let’s play a game.

    You own a lovely house. It’s in a great street, with a great school around the corner and your family living nearby. You not only own a great house. In our game you are doubly lucky. The value of your house has risen. And risen a lot, 133% over the past 5 years, that’s 18.4% pa. Lucky you.

    One day you are minding your business, quietly tending your award winning roses and a property developer, resplendent in gold chain and white shoes, with a retinue of hangers on, offers to buy your house. The offer isn’t great. In fact it’s for less than your property’s rateable value, a lot less.

    Do you a) invite the developer in for a cup of tea, b) politely smile and see them on their way or c) screw the offer up, toss it in the bin and go back to living your lucky life?

    Shareholders in Infratil know this game well. On 8 December Australian Super announced an unsolicited bid for the company, in our view clearly undervaluing the business. The right answer from shareholders to the game they are playing is c.

    Not everyone seems to agree and at least one shareholder invited them in for tea; a decision that feels short sighted at best.

    The logic for saying no, and answering c, at the current offer price is compelling.

    Its a good house – Infratil shareholders have enjoyed spectacular share price returns over the past 5 years: 23.6% pa including dividends. That makes Infratil the 11th best performing company in the New Zealand market over that time. Infratil has delivered for investors consistently over its 25 year history buying attractive assets, managing them well and making smart decisions on when to exit. The management team at Morrison and Co have done their job well and deserve both the plaudits and rewards that come with delivering strong long term returns rather looks of derision from the neighbours who might just be a little jealous of the home they have built.

    It’s a good street – interest rates are low, inflation is low but potentially rising, there is a worldwide demand for yielding assets with inflation protection. Infratil is right in this sweet spot. Active infrastructure investment can deliver investors an exposure, not just to an attractive yield, but to a growing yield. Infratil has grown dividends per share at 6.9% over the past 5 years. There is a reason that a developer bids for your house. They can see the future value in a world that is demanding great houses.

    Great houses, like great companies, are scarce – not every house in the street is the same. And not every house in the street has the same rosy future ahead of it. While it can be tempting to think of value in terms of a short term gain that is not the recipe for building long term wealth. It is the ability of a company to compound returns over the time that results in the best outcomes for shareholders. Companies and management teams with the ability to do that are rare. Selling companies for a small short term gain and missing out on future long term returns can be a very expensive mistake.

    Finding your next house might not be so easy – of course if you do sell your house you still have to live somewhere. That can be tricky. The alternatives are not always as good – maybe the sun shines too brightly into the bedroom window at 6am, the neighbours late night parties are a little noisy or the floor boards may be a squeaky. Selling a strong long term compounder like Infratil presents significant reinvestment challenges. In fact there is the very real risk that you move on from the saccharine high of a short term gain to a future of lower returns

    Community – your home is part of a community. That community in the case of Infratil is the New Zealand capital market. A vibrant, deep and functioning capital market is an important element in making our economy stronger and in delivering better lives to all kiwis. That doesn’t mean we should never sell New Zealand assets to offshore investors, growth capital is valuable, but it certainly means we don’t sell one of our best, scarcest and highest performing assets for prices that just don’t make sense.

    So fellow Infratil shareholders think carefully. If you are called on to make a decision about the future of this company adopt a long term owners mindset. A high quality, asset like Infratil that can compound your wealth over time is rare. And just like the home you love should only be parted with at the highest possible price, if ever.