BIPC Should Support
Higher Valuation for Unique Portfolio
Event
Late last week, BIP hosted a well-attended Investor Day in New York
Impact: POSITIVE
■ We believe that BIP
has good visibility to another year of
above-average growth in 2020. The LP expects same-store growth in constant
currency to be at the high-end of its 6%-9% target range, with same-store
growth to be supplemented by the commissioning of a healthy capital project
backlog and by the net benefit of BIP's recent capital recycling and M&A
activity. In particular, the LP expects to generate $1bln of net proceeds on
the sale of four mature businesses, with the proceeds to be redeployed into
four new investments with an average going-in FFO yield of ~12%. Our sense is
that BIP's remaining deal pipeline is robust, with a focus on data
infrastructure and energy infrastructure in North America and Europe .
■ BIP announced its intention to launch Brookfield
Infrastructure Corporation (BIPC) in H1/20 by way of a tax-free distribution to
unitholders, whereby unitholders will receive one share of BIPC for every nine
units of BIP. The BIPC shares will be structured to provide the same economics
as BIP through a traditional corporate structure. The creation of BIPC should expand BIP's potential investor base
to include investors who would not otherwise invest in LPs due to tax
considerations or other reasons, and should position BIP to qualify for broader index inclusion. All else being
equal, we expect BIPC to support a higher valuation for BIP's unique portfolio
over time.
TD Investment Conclusion
■ Our target price increased to $53.00 from $49.00, as the
impact of a modest increase in our weighted average valuation multiple and a roll-forward
in our target price horizon by one quarter more than offset slight downward
revisions to our near-term forecast to reflect weakness in the BRL and the
potential for some modest slippage in the timing of certain deal closings.
■ In our view, BIP provides investors with a unique
opportunity to own a welldiversified portfolio of long-life infrastructure
assets that enjoy high barriers to entry, generate stable cash flows, and
require relatively minimal maintenance capital expenditures. We believe that
the units offer an attractive
combination of yield and growth.
Details
Stable Base Cash Flow
BIP generates very resilient cash flow, with ~95% of its
cash flow either regulated or contractual. The average contract duration is
nine years, and ~85% of the LP’s contracted volumes are with investment-grade
counterparties.
BIP’s recent capital recycling and M&A activity have
meaningfully improved the diversification of its portfolio by geography and by
sector.
The majority of BIP’s cash flow is not GDP-sensitive (~60%),
and most of the GDP-sensitive cash flow is in the transport sector. The
Brazilian toll roads comprise ~70% of the transport FFO that is
volume-sensitive, and one could argue that those cash flows should have limited
downside vs. the current run-rate given that the country is in the midst of a
slow recovery from a severe recession.
Good Visibility to Strong
Double-Digit Growth in 2020
BIP expects same-store growth in constant currency to be at
the high-end of its 6%-9% target range in 2020, with same-store growth to be
supplemented by the commissioning of capital projects and the net benefit of
the LP’s recent capital recycling and M&A activity.
The capital project backlog was $2.2bln as of Q2/19, which
represents ~13% of the existing asset base (proportionate basis), and should be
commissioned over the next 12-36 months.
BIP expects to generate net proceeds of $1bln on the sale of
four mature businesses, with the proceeds to be redeployed into four new
investments with an average going-in FFO yield of ~12%, and higher long-term
growth potential vs. the assets sold.
Overview of Recent Transactions
High-quality data distribution business Nationwide wireless
and fiber network Serves ~2.5mm customers…
Enterprise Value = 2.3 Bil…BIP’s Equity Investment = 200 Mil
North American Rail
Business (Genesee & Wyoming Inc.)
Largest short-haul rail operator in North
America ~26,000 km of track Diversified across commodity groups with
3,000+ customers…
Enterprise Value = 8.4 Bil…BIP’s Equity Investment = 500 Mil
North American
Regulated Gas Pipeline
Co-controlling interest in two operational natural gas
pipelines 740 km of newly-constructed assets No volume or commodity price risk
Fully-contracted under long-term, take-or-pay arrangement U.S. dollar contracts
and shippers…
Enterprise Value = 3.2 Bil…BIP’s Equity Investment = 150 Mil
Bilateral arrangement for corporate carve-out ~130,000
communication towers 30-year Master Services Agreement with anchor customer…
Enterprise Value = 7.9 Bil…BIP’s Equity Investment = 400 Mil
BIPC Launch
BIP announced its intention to launch Brookfield
Infrastructure Corporation (BIPC), a publicly-listed Canadian corporation in
H1/20.
BIP will distribute BIPC shares to unitholders on a tax-free
basis, whereby unitholders will receive one share of BIPC for every nine units
of BIP, giving BIPC an initial market cap of ~$2bln.
The transaction will be analogous to a stock split from an
economic/accounting perspective, and the BIPC shares will be structured to
provide the same economics as BIP units. The dividends/distributions will be
equivalent, and BIPC shares will be exchangeable into BIP units at any time at
the shareholder’s option.
The objective of establishing BIPC is to: 1) expand BIP's
investor base by attracting new investors who would not otherwise invest in LPs
due to tax considerations or other reasons; and 2) position BIP to qualify for
broader index inclusion (Russell indices, MSCI indices, etc.)
All else being equal, we expect the launch of BIPC to
support a higher valuation for BIP’s unique portfolio over time.
Strong Investor Appetite for
Infrastructure Debt
BIP highlighted that the search for yield has led to an
ample supply of debt at historically low cost, with a noticeable increase in
non-investment grade lending.
Despite bull market conditions, the LP is maintaining a
disciplined and conservative approach to financing the business, with a focus
on securing covenant-light financing on attractive terms, with a leverage
profile that ensures ongoing access to a variety of financing sources.
Valuation
The distribution yield is 4.1%, which is below the historical
average of 4.8% (2011- present), but reflects a normal spread vs. the U.S.
Justification of Target Price
We find it difficult to identify a single company or group
of companies that is truly comparable with BIP; therefore, we value the units
with reference to a wide range of peer companies that own infrastructure
assets.
The net asset value estimate supporting our target price
corresponds to a weighted average EV/EBITDA multiple of ~14.1x, which is
applied to our earnings forecast for the 12 months ending September 30, 2021.
We believe that the modest increase in our weighted average valuation multiple
to ~14.1x from ~13.7x is supported by our view that the launch of BIPC, which
broadens BIP’s investor appeal and potential for index inclusion, should
support a higher valuation for the LP’s unique portfolio over time.
Key Risks to Target Price
Key risks to our target price include: 1)
higher-than-expected bond yields; 2) significant FX/commodity price movement;
3) general economic conditions; 4) control by the General Partner; 5)
acquisitions that do not create unitholder value; 6) operational disruptions;
and 7) sovereign risk.
Resources,
TD Securities Inc.
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