BMO analyst update$1.1B Equity Raise Adds More Resources for Capital Deployment
Bottom Line:
We believe the backdrop for BIP is favourable, underpinned by elevated capital deployment, strong demand for its mature investments, and robust organic growth. Moreover, the payout ratio is expected to return to its targeted range in 2022 which should allow distribution growth to edge higher. We rate BIP Outperform.
Key Points
On November 17, BIP completed a US$1.1B equity offering (includes over-allotment) consisting of 9.48M LP units and 2.14M BIPC shares to public investors, as well as 7.1M redeemable partnership units purchased by Brookfield Asset Management (BAMNYSE; US$59.47; rated Outperform by Sohrab Movahedi) that nudged up its proportional ownership to ~30%. The proceeds are intended to fund an active and advanced pipeline of new investment opportunities.
Improved liquidity position. As of Q3/21, BIP's corporate liquidity was $3.0B, or ~ $2.3B after considering its net equity commitments. Layering in expected proceeds from capital recycling over the next 6-12 months ($1B+) and the $1.1B equity issuance, we believe BIP has substantial resources to deploy into new investments through the end of 2022.
2022 expected to be another year of elevated growth capital spending. BIP's M&A pipeline is very active and it appears capital deployment could approach $2.5B over the next 12 months (includes $500M for AusNet), up from the 2018-2020 avg of ~$1.7B. We believe the new investment pipeline is weighted toward data infrastructure and utilities in OECD countries. Management estimates its current late-stage investment opportunities could account for ~$1B of equity (BIP's share), with another ~$0.5B possible beyond the more imminent deals. Meanwhile, BIP expects its organic growth capital investments to reach a new high watermark in 2022 ($1B+) which will require ~ $0.4B of equity funding.
Upside risk to estimates once capital is deployed into new investments, as the initial FFO yield is likely to far exceed the savings from debt repayment assumed in our forecast. Moreover, the redeployment of $1B+ of proceeds from BIP's mature, de-risked businesses into higher-yielding opportunities could add another 200-300 bps to our 2023 FFO/unit estimate.
Target price remains US$65, as the modest equity dilution is offset by a one-turn increase to our P/AFFO multiple.