Brookfield Infrastructure Partners LP BIP

RBC

[retiredcf]

Current and upside scenario targets are US$40.00 and US$45.00. GLTA

November 13, 2023

Brookfield Infrastructure
On the road with Brookfield Infrastructure

Our view: We recently hosted meetings with Sam Pollock (CEO), David Krant (CFO), and Rene Lubianski (Managing Partner) that focused on the investing environment (e.g., acquisitions and divestitures; funding costs) and capital-allocation priorities. We believe that Brookfield Infrastructure remains well-positioned to pursue opportunities in a capital-constrained environment.

Key points:

A buyer’s market and Brookfield Infrastructure expects its acquisitions to generate mid- to high-teens returns. The current capital-constrained environment is providing the partnership what it views as attractive opportunities to deploy capital well above its target equity IRR range of 12–15%. Areas within infrastructure where management sees potential for higher returns include businesses that require additional capital investment (e.g., data center build-outs), GDP-sensitive assets (e.g., Triton), and complex transactions (e.g., Cyxtera).

Capital recycling is all about the spread in returns, not the absolute level of valuations/returns. Downward pressure on M&A valuations has resulted in investors questioning the partnership’s ability to execute its roughly $2 billion of planned asset monetizations in 2024. With a wide range of infrastructure assets spanning multiple geographies, Brookfield Infrastructure has the ability to target the types of assets and the geographies that can garner the highest valuations, while taking advantage of a capital-constrained environment to acquire assets at lower valuations.

Asset monetizations also provide potential to ramp up unit buybacks.

Brookfield Infrastructure views unit buybacks as an attractive way to invest in its own assets (i.e., assets it knows well) when the unit price is not reflecting its view of fair value for the business. BIP noted when it reported results that it has bought back almost one million units under the normal course issuer bid in Q4/23. Further, the partnership sees asset monetizations as potentially providing a larger amount of capital to fund unit buybacks.

Protections against elevated interest rates. More than 90% of Brookfield Infrastructure’s debt is fixed rate with an average maturity of seven years. Further, the partnership pointed to inflation-linked revenues and/or the ability to pass through any increases in the cost of debt for various assets (e.g., regulatory pass-through; lease re-pricing) as helping to mitigate the impact of rising interest rates. As part of its Q3/23 disclosures, Brookfield Infrastructure noted that a hypothetical 200 basis point increase in the cost of debt would impact 2024 FFO by only $25 million