National Bank UpgradeBut their target is well below concensus. GLTA
Seeing the infrastructure super-cycle “just getting started,” National Bank Financial analyst Patrick Kenny upgraded Brookfield Infrastructure Partners L.P. to “outperform” from “sector perform” based on reduced execution risk.
“Having already completed its 2023 asset recycling program, management is focusing its efforts for the remainder of the year towards platform integration and asset optimization while preparing to execute its 2024 US$2.0-billion capital recycling program (previously US$1.5-billion per year) highlighting that its asset base remains positioned to be selective across regions and sectors showcasing its unique intrinsic value while capitalizing on the three Ds (digitization, deglobalization and decarbonization),” he said. “Meanwhile, given high interest rates and inflation, lower economic growth with potential prospects of recession, and scarcity of capital, BIP views the current environment as a ‘buyer’s market.’”
Mr. Kenny acknowledged that rising inflation and technological advances, including artificial intelligence, are “impacting the infrastructure industry at large alongside the biggest threat to operating margins, low economic growth.”
“BIP’s growth strategy has tilted more towards investing in platforms with highly executable organic growth backlogs (80-per-cent contracted; inflation indexed), namely the generational investment cycle into data centres,” he added. “Meanwhile, the capital appreciation component is expected to more than offset the lower going-in yields, driving IRRs above its typical 12-15-per-cent target range. Elsewhere, the company is working to grow revenues while decreasing costs through organizational optimization techniques, including the introduction of AI to help bolster returns.”
Ahead of the release of its third-quarter financial results, Mr. Kenny is forecasting funds from operations per unit of 72 US cents, which is 3 US cents below the consensus on the Street but up almost 5 per cent from a year ago. He attributed the gains to “partial contributions from capital recycling and optimization efforts, offset by lower contributions within Midstream/Transport and recent divestitures including AusNet, 12.5 per cent of the U.S. Natural Gas Pipeline Company, and the New Zealand integrated data distribution business (Vodafone).”
After incorporating National Bank’s longer-term interest rate assumptions into his capital cost projections, Mr. Kenny lowered his target for Brookfield Infrastructure shares to US$33 from US$38. The average is US$41.42.
“With the stock down almost 30 per cent since mid-summer following recent delays in commissioning HPC and the recent closing of the Triton acquisition (issuing 21 million BIPC shares), combined with BIP now trading at a 20-per-cent discount to our sum-of-the-parts valuation of US$31, we are upgrading the name,” he concluded.