Infratil: NZSA, ACC split on Morrison & Co's management fees

Director Marko Bogoievski listens to a shareholder question about "Who runs Infratil?" Image / Livestream still

The NZ Shareholders Association and major investor ACC took opposing sides as Morrison & Co.'s fee for managing Infratil again came into the spotlight.

Infratil's annual meeting yesterday saw Morrison & Co chief executive and Peter Springford almost unanimously supported for election to the board.

But a motion to pay the second installment of Morrison and Co.'s annual management fee in scrip pass by a notably lower margin with 13.5 per cent opposing it.

Leading the opposition was the investment arm of ACC, which holds a 6.9 per cent stake.

The Crown agency said it accepted that the complicated fee structure was "an accident of history" rather than "deliberately complex" but said it was nonetheless too opaque, and allowed bonuses even if three of four buckets of assets were under-performing. ACC wanted to know what was in each bucket of assets and for gains for each to be revealed in dollar terms. It suggested the current 16-page agreement governing the fee be renegotiated and simplified.

Infratil chairman Mark Tume later told the Herald that "Recently the board had a detailed review of the economic terms carried out by an independent party [ Ed Schuck of Fidato Advisory] and that review concludes that it is largely advantageous to shareholders; particularly the hurdle of 12% and the exclusion of NZ assets. Back-testing of more modern agreements has confirmed this is the case."

Shareholders Association CEO Michael Midgley that "generally the NZSA is not happy with external management." The complexity of the fee deal made it hard to get a handle on whether Morrison and Co. was being under or over or correctly compensated.

However, the fact Infratil was a strong performer took some of the heat out of the issue, and the resolution was confined to whether the second installment of the incentive fee should be paid in shares. Midgley said that incremental measure made sense in business terms, so his organisation voted for it.

Infratil's bull-run on the NZX was interrupted by the Covid scare, but its stock has recovered ground since roughing during the March lockdown. Source / NZX

Earlier, Bogoievski told the AGM's virtual audience that Infratil had averaged 17 to 18 per cent total returns since the company listed in 1994 - the same year that Wellington-based asset manager Morrison and Co was appointed manager.

Morrison & Co has been paid a fixed annual fee, plus an incentive payment if an independent valuation finds the value of three buckets of international assets plus one bucket of NZ assets have increased by 12 per cent or more. If any one of the buckets passes the 12 per cent gain threshold, Morrison & Co keeps 20 per cent of the gain.

For 2020, Morrison & Co was paid management fees of $37.5 million (up from 2019's $24.9m) a portfolio incentive fee of $125m (up from 2019's $102.6m.

The incentive fee is payable in three equal instalments. The first was paid in cash. The second can now be paid in shares - or at least, the board now has that option - following the scrip resolution that passed with minor rebellion.

Infratil shares rise on $100m buyback

Infratil shares rose in late trading yesterday to close up 3.6 per cent to $4.92 after the company announced it would buy back 20 million shares. The stock rose again to $4.94 in early trading todya.

The buybacks may take place between August 26 this year and July 22 next year, on the NZX only.

On yesterday's closing price, the programme would involve just under $100 million worth of scrip (Infratil has 722,952,533 shares outstanding and a market cap of $3.6 billion).

The company filed notice of the buyback to the NZX shortly after the AGM closed and the result of the resolution to pay Morrison & Co's second incentive payment in scrip was announced.

"Who runs Infratil?

A last-minute, pandemic-inspired move to make the meeting online only, with questions submitted online read by director Alison Gerry and no followups, muted the discourse, and there was no discussion over the level of Morrison and Co's fees.

The amount of the fee was not brought up in questions from the virtual audience, although shareholder John Kennedy did ask "Does Morrison and Co. run the company or does Infratil?"

To which Gerry replied, "The primary role of Infratil's board is to approve and monitor the strategic direction of Infratil, which is recommended by our manager Morrison and Co."

Morrison and Co. boss Bogievski, speaking in his dual capacity as an Infratil director, added that Morrison's brief, "covers a broad range of services, whether it's originating new ideas that could be sector coverage working with our own employees or outside experts to develop views on markets, getting geographic coverage, pulling together data where equity capital markets activity, accounting, egal and company secretarial support, and risk-management compliance services."

Partial guidance reiterated

Bogoievski did not speak to the fee for the year to March directly, but did say, "We do want to remind ourselves, I think, just how successful that year was. We had quite strong earnings growth both at the operating level, and net profit up after before tax."

Net profit after tax jumped from $52m in 2019 to $484.2m in 2020 (in part, as Bogievski acknowledged, because of the sale of Tilt Renewables' Snowden Peak windfarm) as revenue eased from 2019's $1.44b to $1.37b.

Bogoievski reiterated that there was no full 2021 guidance, due to Covid-19 uncertainty, but he also reiterated the partial guidance issued in May, which saw profit-contributions estimated from three major Infratil investments (Trustpower with Ebitdaf in the range
of $190-$215m; Tilt Renewables with A$65- A$80m ebitdaf and Canberra Data Centres with A$145m to A$155m).

In June, Infratil raised $300m with an equity issue - a roughly 10 per cent increase in its number of shares.

"Unlike some other companies that recently issued new shares, we did not need to raise equity in response to adverse financial outcomes arising from the pandemic," Tume told virtual audience at the AGM.

"Rather, our intention was to ensure that we are very well placed to support our businesses growth initiatives and give us flexibility to take advantage of any new opportunities."

Bogoievski said the diversity of Infratil's portfolio put it in a good position to grapple with the pandemic overall. Retire Australia (which houses around 500,000 Australian senior citizens) and Wellington Airport faced obvious challenges, but demand for TrustPower and Vodafone's services had proved resilient, and CDC, which partners with Microsoft and other cloud computing giants had grown its business strongly during Covid lockdowns.

A data and connectivity company

Historically, many investors would have seen Infratil in terms of buses, airports and power

But with the scale of Vodafone NZ (in which Infartil holds a 50 per cent stake), Trustpower's growing broadband business (more than 100,000 of its customers now get bundled internet) and CDC growing 30 per cent to 40 per cent per year, Bogoievsky said shareholders could now perhaps view it as a "data and connectivity company".

Director Marko Bogoievski pointed out to shareholders that Infratil could now be called a "data and connectivity company" given the size of Vodafone and CDC. Source / Infratil AGM presentation

With Vodafone, Infratil was addressing what Bogoievsky called "historic under-investment" with its 5G mobile network upgrade and other technology upgrades.

CDC (in which Infratil holds a 48 per cent stake) is soon to make its first foray onto this side of the Tasman, with plans to build two large-scale data centres in Auckland.