February 3, 2023
Brookfield Infrastructure
Discount to NAV provides an attractive entry point
Our view: We believe that BIP's units represent a compelling opportunity for investors given: (1) the valuation (i.e., units trading below the low- end of our estimated NAV range); (2) the 12-15% FFO/unit growth outlook for 2023; (3) the partnership's ability to take advantage of a range of macroeconomic scenarios via its longstanding capital rotation strategy; and (4) optionality to finance certain transactions using BIPC's shares at a premium to BIP's units.
Key points:
Attractive entry point given the discount to estimated NAV as well as the discount to BIPC. The units are currently trading at a roughly 13% discount to the low-end of the range of our estimated net asset value (NAV) for the existing assets (i.e., no value for potential investments). As shown in Exhibit 1 on page 2, there have been very few times during Brookfield Infrastructure's history where this has been the case. Further, the units are trading at a roughly 28% discount to BIPC's shares, which is also at a historically wide level (please see Exhibit 2 on page 2).
Results were in line with our expectations and consensus. BIP's FFO/unit in Q4/22 matched our forecast of $0.72 and consensus of $0.72 (seven estimates; range of $0.71-0.73). Further, there were no major variances within the partnership's operating segments. Please see Exhibit 3 on page 3 for a table showing the segment FFO versus our forecast.
Distributions increased by 6%. BIP announced a 6% increase in its distribution to a new annualized rate of $1.53/unit, which is fairly close to our estimate for an increase in the distribution to $1.56/unit. While the 6% increase was below the 10% organic FFO growth rate in 2022 and the partnership's guidance for 12-15% FFO/unit growth into 2023, management noted the partnership's sizable capital backlog and potential for tuck-in acquisitions as contributing factors to retain some additional capital.
Upbeat on growth with capital recycling poised to help with funding.
BIP noted that it has "replenished" its investment pipeline and in addition to evaluating "several" corporate carve-outs, a "large component" of its investment pipeline is comprised of public-to-private opportunities, some of which where BIP has already established a modest toe-hold position. On the asset monetization front, BIP noted that it has launched the next round of asset sales that it believes should generate over $2 billion in proceeds (net to BIP) in 2023.
Slight change to our 2023 FFO estimate; outlook into 2024 remains unchanged. For 2023, we have slightly reduced our FFO/unit estimate to $3.07 (down from $3.09) to primarily reflect the German tower acquisition closing one month later than we previously forecast as well as a modestly longer ramp up period for the Heartland Petrochemical Complex.