Steady long-term growth in a difficult investment environment
Brookfield Infrastructure Partners, which owns a large variety of diverse assets all over the world, is set to benefit from global growth in the coming years.
brookfieldInfrastructure Partners (BIP) is one of the largest publicly listed infrastructure companies in America and is the flagship infrastructure company of Brookfield Asset Management, a leading global alternative asset manager with about $250bn of assets under management.
BIP owns and operates infrastructure assets, including ports, toll roads, railways, utilities, natural gas transmission and telecommunication towers, across five global regions (North America, South America, Europe, Asia and Australasia). It has “hard” assets that operate in highly oligopolistic markets in most cases, i.e. not only do they retain their value, they allow BIP to be a price maker instead of a price taker.
Why we like it
We believe the current macro trends that are developing places BIP in a very envious position: McKinsey & Company estimates that an annual $3.3tr needs to be invested in infrastructure in order to keep pace with the projected global growth rates. Currently there is an annual funding gap of around $350bn. Although there are still few details on Trump’s actual plan, it’s safe to say that at least some of the planned $1tr investment into new infrastructure development will be spent. Most of BIP’s revenues are derived from North America. This is a powerful growth driver for BIP as it will lead to higher utilisation of currents assets and secondly to the creation of new opportunities through an increased infrastructure gap. BIP has considerable exposure to emerging markets, especially India and Brazil. The company recently increased its stakes significantly in these countries (telecommunication towers, toll roads and natural gas utilities) and is poised to take advantage of India’s high growth rates and Brazil’s economic recovery from what was essentially the country’s worst economic slump in a century. In addition to the above and other organic earnings drivers, one of the most important facets of the business is the high barriers to entry – significant regulation and capital requirements – which bestows upon it a large economic moat, protecting its earnings and growth profile. The certainty of BIP’s cash flows is further enhanced by contractually “locked-in” and regulated assets. This provides it with the added benefit of being able to easily raise capital for future projects. The defensive characteristics are quite evident and reduce the impact of market volatility
and economic gyrations. BIP’s exposure to volatile emerging market currencies may impact revenues and profitability. The impact should however be limited as the company has a hedging program in place.
Some key risks include: There is a risk of counterparties failing to make contractual payments, especially in the emerging markets it operates in. Their diversified nature does however minimise the impact that a single failure would have on earnings. A major global economic event, like a Chinese hard landing or another European crisis, could cause a drop in demand for its assets. Such events will however not affect the company on a short-term basis as most of their revenues are regulated and contracted. According to our calculations and keeping in mind that conservative expectations were used (relative to consensus) the company’s fair price range is between $36 and $42. (It was trading at $35.56 at the time of writing on 10 March.) In addition to the possible capital appreciation, BIP pays a hefty dividend of around 4.8% and we expect the dividend growth to continue in the region of 10% to 12% a year.