May 4, 2023
Brookfield Infrastructure
Core strategies continue to drive upside
Our view: Against the backdrop of a challenging equity market environment, BIP continues to deliver steady and growing cash flow from its existing assets, while providing a unique capital recycling value proposition for investors relative to other companies in the Canadian infrastructure space. We believe the strong liquidity and multiple avenues to raise capital, including via its private funds, provide BIP with the ability to execute transactions in difficult environments, which is historically when BIP has done many of its best deals.
Key points:
Annual capital deployment target already achieved. Between the acquisition of Data4, a European data center platform, and Triton (please click here), BIP expects its share of capital deployment to be approximately $1.6 billion. For Data4, BIP highlighted that 80% of the revenue is underpinned by contracts with an average remaining life of eight years with investment-grade hyperscalers. Growth wise, BIP expects Data4's capacity to increase to 500 MW (up from 100 MW currently in place) with "a significant proportion" of that growth having been contracted or reserved, and all of the required land already being owned and power having been secured to support the expansion plans.
Capital recycling continues to play a key role this year. In aggregate, BIP expects to generate about $2 billion from asset sales in 2023. In terms of transactions to date, BIP highlighted the sale of two U.S. natural gas storage assets for roughly $100 million (net to BIP), consisting of its stakes in Tres Palacios in Texas and Salt Plains in Oklahoma, with BIP noting valuations on the sales of 21x and 15x EBITDA, respectively.
Seeing upside from global supply chains. This quarter, BIP highlighted its thesis that lower value-add goods such as apparel, furniture and household items will continue to be manufactured in lower cost jurisdictions (i.e., not likely to be subject to BIP’s onshoring theme) and require traditional, container-based transportation. Further, BIP believes manufacturers will look to diversify their sourcing of supplies beyond China (i.e., China +1 strategy), which could drive significant investment in supply chains, thereby enhancing the value of BIP’s existing rail and ports businesses, as well as underpinning its proposed investment in Triton.
Adjusting our estimates for acquisitions and more moderate commodity margins. For 2023, our new FFO/unit is $3.01 (down from $3.07), primarily reflecting a more modest forecast for commodity margins, particularly for Inter Pipeline’s business (e.g., olefinic and paraffinic frac spreads; polypropylene margins). For 2024, our new FFO estimate is $3.41 (up from $3.27), reflecting forecast accretion from the Triton acquisition (i.e., FFO contribution net of dilution from the BIPC shares issued) and to a lesser extent, the Data4 acquisition. Partially offsetting the acquisitions is our forecast for more modest commodity margins.