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.

Finweek English Edition - - MARKETPLACE - Editorial@fin­week.co.za Stein­man de Bruyn is a direc­tor of Capilis As­set Man­agers.

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.

Val­u­a­tion Risks

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.

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