Ig­nore Car­il­lion’s col­lapse – 3i In­fra­struc­ture is a risk worth tak­ing right now

The 3i Group sub­sidiary’s div­i­dend is up and has as­sets likely to ap­pre­ci­ate fur­ther, writes James Ash­ton

The Sunday Telegraph - Money & Business - - Business - Read Questor’s rules of in­vest­ment be­fore you fol­low our tips: tele­graph.co.uk/go/ questor­rules; twit­ter.com/dtquestor

EVEN af­ter last week’s mar­ket sell-off, one stock that has per­formed strongly since be­ing tipped in this col­umn is 3i Group. The pri­vate-eq­uity in­vestor did not look cheap in April last year and some of the pre­mium has since come off the shares but the value of the port­fo­lio has risen sharply. Much of the ex­cite­ment cen­tres on

Dutch dis­count re­tailer

Ac­tion, which 3i is ex­pand­ing rapidly across the con­ti­nent. It con­trib­utes more than 30pc of the value of 3i’s port­fo­lio and chief ex­ec­u­tive Si­mon Bor­rows is un­likely to re­alise the as­set un­til his team has worked out just how far the for­mat can go. I don’t mind wait­ing be­cause I fol­lowed my own ad­vice and bought the shares. What is less well un­der­stood than the £9bn mother ship is 3i In­fra­struc­ture, a sub­sidiary with its own list­ing that is man­aged and 34pc-owned by 3i Group. Its port­fo­lio is set up to be less risky than its par­ent and de­liver stronger re­turns.

The idea that in­fra­struc­ture is a steady in­vest­ment class has been tested by the col­lapse of Car­il­lion and Labour Party threats to over­haul pub­lic-pri­vate part­ner­ships should it form the next govern­ment. The care home in­dus­try in par­tic­u­lar of­fers a warn­ing of what can hap­pen when state fund­ing tight­ens con­sid­er­ably. But the £1.4bn takeover last month of the John Laing In­fra­struc­ture Fund shows that in­vestors still see value to be had. The of­fer for the mainly Uk-based port­fo­lio of schools, roads, trains and street-light­ing projects was priced at a 20pc pre­mium to the lat­est pub­lished net as­set value.

3i In­fra­struc­ture is highly un­likely to suc­cumb to a takeover be­cause of 3i Group’s block­ing stake. But some of its as­sets ap­pear primed to ap­pre­ci­ate fur­ther. Cross Lon­don Trains (XLT) has al­ready in­creased in value by 32pc in the last fi­nan­cial year. The com­pany, one-third owned by 3i In­fra­struc­ture, was set up to buy and lease the rolling stock used on the Thames­link pas­sen­ger fran­chise that runs north and south through Lon­don. Af­ter an ini­tial 20-year pe­riod, XLT will re­tain own­er­ship and be free to lease them else­where.

All 115 trains in the fleet are now in ser­vice. Be­cause the risk has fallen, the group is hint­ing heav­ily that it can re­duce the dis­count rate – the tool which as­sesses present and fu­ture costs – on this as­set fur­ther. We will find out how much XLT can be writ­ten up by in in­terim fig­ures due on Nov 8. 3i In­fra­struc­ture has form, record­ing a 40pc in­ter­nal rate of re­turn when it dis­posed of Ever­sholt Rail, an­other rolling stock com­pany.

An­other no­table in­vest­ment is Wire­less In­fra­struc­ture Group, which runs over 2,000 UK mo­bile phone tow­ers in­de­pen­dently of the mo­bile op­er­a­tors. Split­ting off such in­fra­struc­ture is a grow­ing trend, par­tic­u­larly for debt-laden groups such as Voda­fone, which re­cently raised the prospect of a dis­posal. Wig also plans to in­vest in more fi­bre and masts to boost ur­ban cov­er­age. 3i In­fra­struc­ture upped its stake to 93pc last De­cem­ber when it bought out co-in­vestor Bar­ings. Now Wig is vy­ing to build and op­er­ate a wire­less net­work for Trans­port for Lon­don so com­muters can fi­nally have seam­less cov­er­age on their way to work.

3i In­fra­struc­ture has suf­fi­cient bal­ance sheet strength to make an­other size­able in­vest­ment soon. Fol­low­ing some sig­nif­i­cant ac­tiv­ity, an­a­lysts at Canac­cord Ge­nu­ity es­ti­mate that two thirds of its port­fo­lio is less than three years old. That might im­pact short-term re­turns, they point out. It has en­joyed a strong pe­riod, de­liv­er­ing an­nu­alised net as­set value and to­tal share­holder re­turns of 17.7pc and 18.4pc re­spec­tively, against tar­geted re­turns of 8-10pc. Ex­its have in­cluded Anglian Wa­ter and Ele­nia, a Fin­nish power dis­trib­u­tor.

With a mar­ket value of £2bn, the shares are flat on this time last year af­ter en­dur­ing some volatil­ity. They trade at a 12pc pre­mium to 218.3p, the net as­set value es­ti­mated by JP Mor­gan Cazen­ove for the half-year stage, which rises to 223.2p at the end of the cur­rent fi­nan­cial year. In ad­di­tion, the tar­geted div­i­dend has been raised 10pc to 8.65p and should grow pro­gres­sively from there. Like 3i Group, the stock is not cheap, but the re­cent re­fash­ion­ing of the port­fo­lio and a rep­u­ta­tion for mark­ing val­u­a­tions con­ser­va­tively sug­gests there is an up­side to come. Buy.

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