Brookfield Infrastructure LP (BIP)

Brookfield Infrastructure L.P. (BIP) operates infrastructure assets located in North and South America, Australasia, and Europe providing essential products and services for the global economy. The cash flow is stable with approximately 80% of earnings before interest, taxes, depreciation and amortization (EBITDA) supported by regulated or contracted revenues. The long life assets require relatively minimal maintenance capital expenditures; have barriers to entry and other characteristics that tend to appreciate the value over time. Units of Brookfield Infrastructure Partners trade on the New York Stock Exchange and on the Toronto Stock Exchange.

BIP was spun out of Brookfield Asset Management (BAM) in early 2008 and BAM continues to own 30% of BIP. At the time of the spinoff the company consisted of electricity transmission assets in Chile, North America, and Brazil, and standing timber assets in Western Canada and Western United States. In Late 2009 BAM/BIP participated in the recapitalization of Australian based Prime Infrastructure the former Babcock & Brown acquiring a 40% interest in Prime and then in late 2010 BIP merged with Prime Infrastructure.

Brookfield Infrastructure LP (BIP) Valuation Summary: 

Worldwide macroeconomic issues are creating opportunities for the contrarian and value investment approach used by Brookfield.  They buy and invest in real assets with stable cash flows at a good value; assets with barriers to entry that provide basic goods and services needed worldwide. The hard assets with geographic and currency diversification provide a hedge against inflation or repressive policies.  As an added benefit they show good upside potential exists over a 3-5 year time frame.

It appears a reasonable entry price is $30/share (or below) yielding a 30% margin of safety. An estimated intrinsic value of $40-46/share could be realized in a 3-5 year time frame. While we wait for the appreciation the company is paying a 5% dividend with potential to grow. The dividend was increased 20% in 2011.

Economic Backdrop:

Eventually the U.S. and European levels of government (sovereign) debt will need to be addressed.   Government’s methods to deal with this are discussed in an excellent book, a best seller, “This Time is Different” by economists Carmen M. Reinhart and Kenneth
S. Rogoff. In the book they compile empirical data on past worldwide fiscal crises and the almost inevitable outcomes. They use the International Monetary Fund’s data base to provide an understanding spanning several centuries and 60+ countries on how sovereign debt and deficit issues get resolved. There are two methods favored by politicians because they are the most politically tolerable:

  1. Inflation; is preferred over unpopular tax increases and/or expenditure cuts. Increased money supply without a corresponding increase in production of goods or services will cause inflation. The money supply in both U.S. and Europe was increased dramatically as a result of the recent financial crises and will likely continue. Why is inflation an advantage? Inflation enables debt to be paid back with lower valued money than was originally borrowed. For example, if over 10 years inflation is 7% per year the dollar will buy 1/2 of what it used to ten years earlier. In this example debtors will pay a 50 cent dollar for each 100 cent dollar previously borrowed.
  2. Repression; can take different forms but one form we are experiencing today is forcing savers and investors to accept below “normal” interest rates to make it less expensive for the debtors to pay off loans. The Federal Reserve’s stated policy of keeping interest rates a near zero levels until mid 2014 is highly unusual and an example in my view of repression. Low rates may continue beyond. In effect the prudent (savers and investors) are forced to accept below normal returns until the imprudent make up for their mistakes (too much borrowing).

Fiscal and monetary policy in the U.S. and abroad continues to be highly stimulative in efforts to combat another recession, unemployment and the ongoing banking crises now centered in Europe. The infusion of money into the mature economies of U.S. and Europe for these reasons and to address sovereign debt has created a heightened risk of
inflation. The central banks’ policies to combat potential deflation could over shoot, and the banks make it clear they will error on the side of inflation if needed.  Inflation is perhaps the greatest risks portfolios will face.

If history is a precedent, and it often is, sovereign debt will likely be resolved through currency inflation and repression.  Inflation can result in real wealth destruction. So what can we do? Equities and hard assets tend to rise in value during inflationary times although there is typically a lag. Jeremy Grantham, in his 4th quarter 2011 letter does an excellent job in Part III of the letter discussing equities as inflation hedges. He has
an excellent track record forecasting and his analysis is superb. I highly recommend you register for all GMO’s quarterly letters and forecasts here at their site. They are well worth the time to read.

Infrastructure Assets:

Infrastructure is an asset class providing investment characteristics desirable during periods of inflation and repression. The assets represent a mix of the large public or private facilities necessary for economic activity. Examples include power generation and transmission, water supplies and treatment, rail, roads, bridges, tunnels, ports, airports. Infrastructure investment characteristics include:

  1. Assets costly to construct with long lives providing a vital service.
  2. Demand tends to be inelastic given the scarcity of the resources being offered.
  3. Monopolistic pricing power often regulated with long term stable cash flows.
  4. Hybrid characteristics showing both fixed income like cash flows with potential capital gains.
  5. Assets that can be expanded allowing for value to grow over time.
  6. Investments range from low-risk regulated assets to moderate risk loosely regulated assets.
  7. Varying amounts of inflation protection and different levels of vulnerability to economic cycles.

Investor interest in infrastructure is increasing dramatically due to global population
and economic growth, much needed spending on infrastructure and a deficiency in government budgets around the world. This provides an opportunity for private sector involvement. Current estimates of global infrastructure spending range considerably. A survey of 300 senior infrastructure professionals showed through 2030 infrastructure investments would range between $34 and $60 trillion through 2030. The 2030 projections focus is on 25 countries, including China, Brazil, India, the United States and Indonesia, among others according to Infrastructure Investor. This presents incredible potential for private sector involvement and Brookfield Infrastructure L.P. (BIP).

Company Description/Profile:

BIP’s infrastructure business has high barriers to entry and strong competitive positions generating cash flows under a number of different revenue frameworks. BIP groups the businesses into operating platforms based on the similarities in their underlying economic drivers:

Source: Brookfield Infrastructure 4Q 2011 Supplemental Information:

BIP’s portfolio consists of globally diversified relatively new high quality infrastructure assets that provide essential products and services for the global economy. Currently 41% of the cash flows are underpinned by contractual arrangements and 38% are regulated and further supported by take-or-pay contracts.

Source: BIP Map of Operations

Utilities

Utilities consist of a portfolio of regulated business that earns a regulated or contracted return on the asset base. Cash flows tend to be very stable and predictable. The utilities platform also benefits from having a diverse portfolio of assets. With operations located in four different countries, regulatory risk is reduced.

Transport & Energy Infrastructure

The Transport & Energy business is a geographically diverse, capital intensive fee for service business comprised of transportation, storage and handling services for energy, freight and commodity businesses. The business generally benefits from the increased movement of energy, freight and bulk commodities. Over the long-term these tend to increase with the growth in the economy. Performance has tended to remain stable despite the poor macro outlook. The business benefits from:

  1. High barriers to entry due to location advantages and regulatory restrictions that mitigates competition and enables long-term contracts with customers. About 70% of the EBITDA in this segment is subject to long-term contracts.
  2. The diversity of the businesses tends to lessen the impact of fluctuations in demand from any sector, commodity or customer. The premier assets are ports and Brookfield Rail (formerly WestNet Rail).

Timber

Consist of high quality timberlands in western Canada and NW United States with access to export markets. Timber has reliable long-term biological growth, and the growth is perpetual. It can be captured and stored as un-harvested timber over an indefinite period of time or harvested for income and capital appreciation. On average a tree’s wood volume increases 2 – 8% annually and compounds over time, yielding higher value trees as they mature. These attributes allow timberland managers to switch between income
when lumber prices are high and capital appreciation when lumber prices are less favorable maximizing total returns by matching harvest opportunities to market conditions.

Operating History:

The acquisition of 40% of Prime Infrastructure in 2009 and the subsequent merger in 2010 was significant on the structure and financials of BIP. Unfortunately this makes prior year comparisons beyond 2009 meaningless. However we can evaluate how management is doing with respect to their stated objectives.

To measure performance BIP’s focus is on net income and funds from operations (FFO) and adjusted funds from operations (AFFO). FFO is net income excluding the impact of depreciation, depletion and amortization, deferred taxes and other non-cash items. AFFO is FFO less maintenance capital expenditures (capex) or what Warren Buffet refers to as “owner’s earnings”.  FFO is a measure of operating performance and AFFO is a measure of the sustainable cash flow of the business.

To assess performance as stewards of our capital BIP tracks returns on invested capital defined as AFFO divided by the capital invested in the business. Invested capital is partnership capital; the equivalent of equity in a corporation, or what we own. Certain items are added back and shown in the reconciliation below. Invested capital is a measure that does not have standardized meaning prescribed by the International Financial Reporting Standards (IFRS) but provides a more complete understanding of the investment in each of the businesses. AFFO yield on invested capital evaluates cash return on net capital deployed by removing the effect of non-cash impacts on the capital base.

Performance Targets and Key Measures

BIP’s stated return objective is to earn a total return of 12% to 15% per year on the infrastructure assets owned measured over the long-term from both cash flow from operations and growth. Operations are managed to generate increasing funds from operations per unit. Let’s see how they’ve done since the Prime Infrastructure merger was initiated in 2009:

We need to keep in mind the merger was with a troubled company with a lot of opportunity. The invested capital increased over 100% in two years. The return goal is “over the long-term” reflecting the necessity to be patient with capital intensive businesses; even so, returns in the short term are increasing under BIP management.

If successful the company distributions to unit holders will increase and improved FFO per unit should result in capital appreciation. As a whole the key performance measure is AFFO yield, AFFO divided by invested capital. AFFO yield measures the sustainable return on capital deployed. The company also measures the growth of FFO per unit, which is a proxy for their ability to increase distributions.

Distribution Policy

BIP’s policy is to pay a sustainable distribution while retaining sufficient liquidity to fund recurring growth capital expenditures. They state a payout of 60% to 70% of FFO is appropriate. Accordingly, if FFO continues to grow so should the distribution (dividend)  to unit holders. Management seems to feel this way too:  “In light of the per unit FFO growth that we foresee in our operations we are targeting 3% to 7% annual distribution growth.”

Since the Prime Infrastructure merger BIP has demonstrated strong FFO growth and a corresponding increase in distributions. We’ll see in the Investment Thesis section below numerous organic growth projects are under way that should continue this trend. The current distribution yields 5.1% with the quarterly distribution increased by 13% to $0.31 per unit in February 2011; 13% to $0.35 per unit in August 2011 and 7% to $0.375 per unit in February 2012.

A more direct question is how are unit holders benefiting?  For example earnings growth, or any growth for that matter, can be diluted through additional unit issuance. Unit holder ownership claims can also fall behind increasing debt burdens and decreasing
book value.

Increases in book value per unit and distribution payments to unit holders provide a direct measure of how unit holders benefit from the financial performance of the company because:

  1. Distribution payments are returns directly to the unit holder.
  2. Retained earnings entrusted to management if effectively invested increase book value per unit overtime. Increase book value will eventually result in increases in unit price.
  3. Unit re-purchases, if done wisely for the benefit of unit holders; increase book
    value per unit provided they are not just offsets to dilution by option awards.

Compiling book value per unit and distribution payments over the long term show how effective unit holders’ money is being managed. In BIP’s case we have only two relevant years since the beginning of the Prime Infrastructure merger for comparison:

Management appears to be doing an outstanding job. Book value per unit increased at an
average rate of 52.6%/year during the past two years.  The distribution yield was about 5%/year and provided income to unit holders while they enjoyed the book value appreciation. These results were achieved primarily from the impact of the synergies with the Prime Infrastructure merger and are not sustainable at these levels. However
they are impressive and we can hope for spurts of growth from time to time. Management is doing an excellent job for unit holders.

Limited Partnership Structure:

Brookfield Asset Management (BAM) is the general partner and manager of the Infrastructure Partnership. The Partnership relies on BAM to provide day to day management and administrative services. BAM receives a base management fee equal to 1.25% annually of the market capitalization of BIP. Based on the market value of the partnership year end 2011 the fee would be approximately $60 million per year. BAM is also is entitled to receive incentive distributions based on the amount by which quarterly distributions on the units of the Infrastructure Partnership exceed thresholds. BAM is entitled to 15% of distributions between $0.305 and $0.330 per unit per quarter, and 25% of distributions above $0.33 per quarter.

Investors at times avoid Master Limited Partnerships (MLP) in the U.S. because U.S. MLPs can become complicated with state income tax filing requirements and concerns with the generation of Unrelated Business Taxable Income (UBTI).  The table below from BIP demonstrates the favorable structure relative to MLPs: 

Source: Brookfield Infrastructure Partners L.P. February 2012 page 27

Investment Thesis:

There is a need for new or upgraded infrastructure investment and a shortfall in government budget allocations in the developed economies of North America and Europe for these investments. In these economies major infrastructure projects were built after World War II and require upgrades or replacement.

The U.S. and European economies may face slow growth for many years as consumers and governments deleverage from decades of deficit spending. With governments at all levels facing constrained budgets alternative sources of funding for infrastructure has encouraged private sector partnerships including asset sales to private owners.

Emerging markets need new infrastructure to support growing populations and a shift of the historically poor to higher incomes and improved quality of life. BIP’s operating platforms are well positioned worldwide to serve both developed and emerging market infrastructure needs for years to come.

BIP is an opportunity to invest in the strong growth emerging markets such of China and  India but at lower risk than investments directly in these countries. BIP assets supply Asia with essential materials and services from Australia with less political risk.  Assets
are located in select South American with favorable policies for investment while supplying the emerging markets there.  BIP participates in China, India, and South
American growth from the safe haven of mature countries ruled by law and efficient markets.

It is believed BIP is a long term compelling investment opportunity for the following reasons many of which are presented in BIP management presentations:

  1. Approximately 80% of cash flow is generated from regulated businesses or longterm contracts.
  2. Operations are diversified by sector in North and South America, Europe and Australasia.
  3. A strong distribution of about 5% in a low to zero interest rate environments.
  4. A defined distributions policy and growing distributions.
  5. A sustainable payout range of 60-70% of FFO providing assurance of continuance.
  6. Substantial growth investment underway with $290 million in progress and funded and a backlog currently at $650 million.

Substantial growth opportunities without capital investment include:

  1. Inflationary increases built into utility, transport and energy businesses.
  2. Timberland prices increases in excess of inflation due to supply/demand fundamentals.
  3. Surplus capacity in port and gas transmission provide upside as developed economies recover.
  4. Incremental cash flow above the take or pay levels at the Australian railroad.
  5. Harvest 120% of long run timber yield to monetize surplus inventory as housing recovers.

Substantial future organic growth with $5 billion under consideration including:

  1. Expansion of Dudgeon Point Australian Coal Terminal $3.5 billion.
  2. $100 million expansion of UK and European ports and $500 million port      opportunities adjacent to Australian rail operations.
  3. $500 million further rail upgrades and expansions.
  4. $200 million transmission projects in South America, $100 million in North      America.

Brookfield Asset Management’s restructuring expertise during the last economic crises enabled the eventual merger of Prime Infrastructure with Brookfield Infrastructure. This greatly expanding the organic growth opportunities as outlined above. Both BAM and BIP are currently working in distressed Europe and other areas of the world looking for more value creating opportunities.  With patience it is believed these currently undefined opportunities will surface for BIP unit holders because that is what BAM and BIP management does best.

Performance of infrastructure assets has tended to remain resilient despite the poor macroeconomic conditions: 

Source: Brookfield Asset Management: The Case for Real Assets, September 2011

Valuation

Net Asset Value (NAV):

Net Asset Value or book value is a term referring to the sum of all of a company’s assets minus its liabilities. It is reflected on the balance sheet as shareholders’ equity or in a limited partnership as partnerships capital. Because the assets and liabilities exist today and many are tangible they can be measured with more precision than future earnings for example.

The company’s book value may also include intangible assets like goodwill. The value of these assets is more subjective than “real” assets such as cash, property, and equipment. Including intangible assets in the calculation of book value may overstate the underlying
worth of the company.  For example goodwill is often the difference between the “real assets” of an acquired company and the price paid for that company. To adjust for this a “tangible” book value is determined by reducing book value by the intangible assets and
goodwill for a more accurate estimate of the value of the company.

Book value may also understate the underlying worth of the company. For example, a prime office property in Manhattan under U.S. GAAP can be depreciated to zero value and reflected that way on the balance sheet even though the property’s actual value increased over the years.

BIP reports under the IFRS standards which require an ongoing revaluation of the fixed assets to their fair values at least once a year if not quarterly. From an asset perspective
IFRS provides, in my view, a more realistic appraisal through ongoing revaluation.

In the Net Asset Value estimated below for BIP the intangible assets and goodwill were retained as stated under the IFRS standards. Goodwill represents the UK Port conservancy in perpetuity and indefinite which is a license from the government to use
the port land indefinitely, clearly a license of real value. The intangible assets are the use  of the Australian coal port terminals use to 2051 with a renewal provision, in effect an asset with a government protected use at this location; also a real value. The Net Asset Value as of 12/31/11:

At the current price of $29.82/unit BIP appears somewhat overvalued at a NAV of $26.31/unit; more on this later.

Earnings Power Value (EPV):

Earnings Power Value is an estimate of the company’s value calculated from free cash flow derived from ongoing operations with no credit given for cash flows anticipated from future growth. Earnings Power Value assumes that current cash flows are sustainable and because future growth is assumed to be zero it is a more conservative
valuation. It eliminates the hazards of trying to predict future growth and the errors associated in the Present Value techniques commonly used even though the future performance, not the actual performance, can often amount to 70-80% of the total value calculated. This is a huge potential margin for error.

Earnings Power Value was determined applying 2011 normalized gross profit margin of 41.3% to revenues of $1636 million and is summarized in the table below. Normalized gross profit margin improved from 25.5% in 2009, and 29.3% in 2010 to 41.3% in 2010 and no improvement in margin or sales assumed beyond what was actually realized in 2011.  The Earnings Power Value as of 12/31/11: 

At the current price of $29.82/unit BIP appears to be extremely overvalued at an EPV of $9.69/unit; more on this later.

Growth Value (GV):

Because of the potential margin for error in forecasting future growth, traditional value investors typically ignored growth.  However, it is hard not to recognize that growth, if achieved, can add considerable value to the company.  One way to solve this conundrum
is refuse to pay for the value of growth, but to consider it as part of the margin of safety.

Growth only has value if it is within the franchise, the area of competitive advantage. Outside the franchise, growth has only temporary value because competitors will eventually step in and eliminate the profit margin. Only firms with sustainable barriers to entry or competitive advantages have a franchise to protect value realized from growth. If the growth is within the franchise the company grows by doing more of the
same. In doing more of the same, it is reasonable to assume that the returns will be similar. The value created by this growth is the incremental return on capital in excess of the company’s cost of capital.

The three sources of BIP’s growth included in this Growth Value determination are those where some basis for estimates are available. Included are incremental cash flow from timber, the railroad expansion under way and certain other growth projects currently underway. All three sources represent approximately $834 million capital primarily in the railroad expansion.

Key assumptions:

Railroad: assumes only the minimum take or pay quantities, management’s estimates of cash flow based on take or pay, no incremental volumes above the base minimums are assumed.

Timber: based on harvesting 120% LSRY by 2014 and a return to mid cycle lumber prices by 2015.

Other projects: assume a 10% levered ROIC on $234 million capital expended equally in 2013 & 2014.

No inflationary or volume increases assumed in base utility, transmission or other businesses.

No benefits assumed for the additional $5 billion capital expenditures under consideration.

No benefits assumed for acquisition and restructurings under consideration worldwide.

These assumptions are believed to be conservative because; BAM/BIP historic ongoing continuous performance improvement. Further it assumes no future organic growth beyond existing projects and ignores contracted inflationary increases in the regulated base and contracted businesses. Finally it ignores potential restructuring opportunities and acquisitions being pursued worldwide but yet undisclosed.

The 2015 incremental Growth Value is added to the assumed no improvement EPV base case in 2011for an estimate of value in 2015. The Growth Value estimate for 12/31/15:

Combining Earnings Power Value and Growth Value yields the following:

At the current price of $29.82/unit BIP appears to be extremely overvalued at an EPV and Growth Value of $20.13/unit; more on this below.

Dividend Discount Value (DDV):
The dividend valuation model is one of the most conservative methods of valuing a stock. Financial theory states the value of a stock is worth all of the future cash flows expected and discounted by an appropriate risk adjusted rate. The premise of the DDV is that the value of a stock today is the present value of all future dividends, only the dividends, the cash flows directly returned to the unit holder are used.

The dividend valuation model can be modified to reflect varying conditions including a constant dividend, growing dividend or a dividend that grows at different rates in future periods. Since BIP is in the early stages of growth with an articulated dividend policy and apparently sustainable dividend in place; a dividend approach should provide insight into valuation.

Two distribution cases were valued based on the conservative projected organic growth in FFO through year 2015. Both cases assume a midway payout ratio of 65% (mid target range of 60-70%) would be achieved and maintained 2016+. The distributions were discounted at the current estimated 8% cost of equity.  After 10 years distribution growth was assumed to be 3% on par with world GDP and assuming no inflation.

Case I assumes projected FFO growth in years 1-5 and the growth will drop to the bottom of management’s estimate or a 3% growth rate in years 5-10 and maintain that growth rate beyond year 10.

Case II assumes projected FFO growth in years 1-5 and the distributions will grow at the top of management’s estimate or a 7% growth rate in years 5-10 and then drop to 3% beyond year 10.

At the current price of $29.82/unit BIP appears to be undervalued in Cases I and II showing a 25% and a 35% margin of safety respectively.

Valuation Summary:

As it turns out this BIP is a good example of how important it is to use multiple valuation methods and weigh the components of each to arrive at a conclusion. We have three different outcomes (undervalued, overvalued and extremely overvalued) depending on the model. Let’s discuss which one is appropriate in this case.

BIP has gone through a recent merger that created a number of opportunities for organic growth through capital investment in projects with long lives. Capital intensive projects of this nature often take years to commission and additional “ramp-up” time before revenues are fully realized. In well managed companies this cash flow timing is factored
into the economics of the project before it is undertaken to be sure it is an economically viable project. Nevertheless, there is a lag between investment and return.

As investments are made they are typically soon reflected in the Net Asset Valuation as the project expenditures show up on the balance sheet as assets, and depending on how they are financed either liabilities or equity. But it may take a few more years before cash flow returns are reflected in the Earnings Power Valuation. In the meantime the EPV is penalized because it is essentially the value of the cash flows less liabilities. If liabilities are increased to finance the investments but cash flows are yet to start, EPV will be depressed during this period. The Growth Value is an attempt to bridge this gap but is problematic in that we are now trying to forecast without a clear picture of each projects potential beyond whatever management chooses to share. In the rail road expansion for example only the conservative take or pay levels.

The NAV and EPV are best suited for companies in a relatively stable operating mode. The Growth Value is only used as the margin of safety and only as good as the information available to forecast. In this case we limited growth to projects underway with conservative assumptions and ignored $5 billion of additional projects under consideration. These usually dependable valuations do not adequately reflect the real
prospects of BIP at this stage of its development.

In these cases usually a value investor’s only choice is to pass and wait for the price to fall. However, you may never get the chance to invest in some good growth opportunities because growth investors tend to push the price up as the company continues to grow (e.g. Amazon).  That is a frustration in value investing (but more than offset by the benefits in my view).

Fortunately, BIP currently pays a strong 5% dividend that reflects management’s confidence in the future. The dividend appears supported by sustainable competitive positions described by management: Following the commissioning of the projects in our capital backlog over 80% of our cash flow will be regulated or generated under long-term contracts. Furthermore, as many of our assets capture inflation through indexation mechanisms, we should enjoy a compounding effect on our cash flows.”  

Benjamin Graham, the father of value investing, addresses this issue to some extent in his book, “The Intelligent Investor” with the following (underline added): Where prime emphasis is not placed on growth the stock is rated as an “income issue,” and the dividend rate retains its long-held importance as the prime determinant of market price. At the other extreme, stocks clearly recognized to be in the rapid-growth
category are valued primarily in terms of the expected growth rate over, say, the next decade, and the cash-dividend rate is more or less left out of the reckoning.”

“It is our belief that shareholders should demand of their managements either a normal payout of earnings—on the order, say, of two-thirds—or else a clear-cut demonstration that the reinvested profits have produced a satisfactory increase in per-share earnings. Such a demonstration could ordinarily be made in the case of a recognized growth company.”

In the case of Brookfield Infrastructure LP we don’t have to demand a normal payout of two-thirds because management is already doing it. The dividend valuation, in my view best reflects the value of BIP at $40-46/unit in a 3-5 year time frame. A reasonable entry price is $30/unit (or below) based on the dividend valuation yielding a 30% margin of safety. The company is paying us a 5% dividend while we wait for the appreciation and the dividend has a potential to grow as well. The dividend was increased 20% in 2011. 

Reasons to Consider this Investment:

Worldwide macroeconomic issues will likely continue creating opportunities for the contrarian and value investment approach used by Brookfield.  They buy and invest in real assets with stable cash flows at a good value; assets with barriers to entry that provide basic goods and services needed worldwide. The hard assets with geographic and currency diversification provide a hedge against inflation, repressive policies and a potential decline in the value of the dollar.  As an added benefit good upside potential exists over the longer term.

  1. The infrastructure asset class offers investors an opportunity to earn superior risk adjusted returns over the long term.
  2. It appears infrastructure assets will be attractive for years to come. The combination of long life assets, stable cash flow, relatively low volatility, high barriers to entry, present an attractive investment alternative.
  3. If inflation increases, BIP’s hard asset base and inflation indexed approach provide some investor protection against a decline in the purchasing power of the dollar.
  4. The dividend valuation reflects the value of BIP at $40-46/unit in a 3-5 year time frame.
  5. A reasonable entry price is $30/unit (or below) based on the dividend valuation yielding a 30% margin of safety.
  6. If repression is used keeping interest rates low; BIP 5% and growing yield with potential capital appreciation is very attractive compared to the alternatives for those wanting long term returns.
  7. BIP is well positioned to benefit from strong growing emerging markets with reduced risk operating from countries with favorable business climates and currencies.
  8. Brookfield has expertise in active infrastructure investment from owning and operating infrastructure assets for over 100 years.
  9. Net institutional interest owns about 75% of units outstanding and in the most recent current quarter net purchased an additional 12.4 million units or      about 7.6% of the company’s float.

Risks:

  1. BIP was spun off of BAM in 2008 and merged with Prime Infrastructure in 2010. These are large material events providing limited operating history for evaluating this investment.
  2. BIP assets are subject to various regulatory reviews in a number of jurisdictions, any of which could result in cash flow reductions and other      adverse changes.
  3. As a global company BIP is exposed to foreign exchange risk, interest rate      risk, global economic conditions and other material impacts that could      adversely affect the business.
  4. Brookfield Asset Management is the general partner of BIP providing services for a fee subject to contractual rights but not fiduciary rights.

Disclosures:

I am long BIP and BAM

The information contained herein is provided for informational purposes only, is not comprehensive, does not contain important disclosures and risk factors associated with investments, and is subject to change without notice. The author is not responsible for the accuracy, completeness or lack thereof of information, nor has the author verified information from third parties which may be relied upon. The information does not take into account the particular investment objectives or financial circumstances of any specific person or organization which may view it. The author is not a registered investment advisor and does not represent the information as a recommendation for readers to buy or sell the securities under discussion. Nothing contained within may be considered an offer or a solicitation to purchase or sell any particular financial instrument. All liability for the content of this information, including any omissions, inaccuracies, errors, or misstatements is expressly disclaimed. Always complete your own due diligence. Before making any investment, investors are advised to review such investment thoroughly and carefully with their financial, legal and tax advisors to determine whether it is suitable for them.

Copyright © 2012 Provalum LLC. All Rights Reserved.

 

 

 

 

 

Trackbacks

  1. […] In Late 2009 BIP participated in the recapitalization of Australian based Prime Infrastructure (the former Babcock & Brown) acquiring a 40% interest. Then in late 2010 BIP merged with Prime Infrastructure. In 2012 BIP’s potential returns for investors was becoming more apparent and secure as it diversified and expanded opportunistically in North and South America, Australasia, and Europe [Here]. […]

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