BBGI Global Infrastructure 22 November 2023
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by BBGI Global Infrastructure. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
BBGI Global Infrastructure (BBGI) occupies lower-risk ground in the UK-listed infrastructure sector. With a globally diversified portfolio of 100% availability-style social infrastructure assets, revenues are highly predictable.
An important feature of BBGI’s investments is that cashflows’ inflation linkage of 0.6% is a mechanical feature of the contracts which govern BBGI’s stewardship of its assets. With no caps or other terms which may be dilutive to returns from higher inflation, contractual payment increases linked to inflation occur at least annually. As we discuss in the Portfolio section, these are all reasons why the board has had the confidence to raise the dividend target for the financial years ending December 2023 and December 2024 to an expected 6% annualised increase from the 2% annualised growth previously targeted.. The 2023 dividend target represents a yield of 5.7%.
We discuss the historic NAV performance in more detail in the Performance section. The major contributors to the consistent and resilient performance BBGI has delivered since IPO, are the low-risk investment strategy, conservative financial management and global diversification within the portfolio, but also the value driven approach to managing the assets and the trust. In particular, as we discuss in the Gearing section, the modest level of corporate-level borrowings has helped in today’s higher interest rate environment. Currently, only £7.9m of the flexible credit facility is drawn on a net basis (or 2.4% of NAV), which the team are targeting to be repaid with excess cash by 31 December 2023.
In a rising interest rate environment, refinancing risk is a potential challenge for many companies and trusts. Despite employing quite significant leverage on an asset level basis, the vast majority is fixed rate debt amortising over the length of its concession period, meaning BBGI is not exposed to interest rate or refinancing risk. Furthermore, higher deposit rates at banks provide a positive tailwind to BBGI’s cashflows, given the sizable cash balances held by the underlying project companies, which earn higher interest rates.
BBGI has delivered steady, growing dividends since it was launched in 2011, with a compound average increase in the annual dividend of 3.4% between 2012 and 2022 which has outpaced UK CPI. Since inflation has become a significant feature, BBGI has so far shown that it offers investors a very tangible link with inflation, with target dividend increases of 6% for 2023 and 2024.
With conservative assumptions built in due to BBGI’s lower risk availability-style investments, BBGI’s weighted average discount rate of 7.2% is an attractive risk premium over the average risk-free rate within the portfolio. Deducting the OCF (see Charges section) leaves shareholders with a prospective NAV IRR of 6.3%. Rather than being fixed in nominal terms, BBGI’s inflation linkage means that actual returns will vary depending on inflation (as well as other variables, see Performance section). As such, when considering these prospective returns, the spread over 15-year index-linked gilts (assuming 2.5% inflation) remains attractive; currently we estimate at c. 2.7%.
The internal management structure gives BBGI a cost advantage over peers, as we discuss in the Charges section. The team report that all of their assets are continuing to perform well, and clients are happy. Importantly, the conservative and defensive approach to management of the assets and the trust has meant no assets are in lock-up or default, and the team are optimistic that they will continue to deliver inflation linked, uncorrelated NAV returns into the future, underpinned by a solid and progressive dividend. As we discuss in the Discount section, with bond yields having potentially plateaued, this could be an interesting moment to consider BBGI’s attractive prospective real returns, especially with its current relatively wide discount of 6.8%, which compares to its five-year average premium of 17%.
- Lower-risk investment proposition, targeting 100% availability-style assets with strong ESG credentials and a direct link to inflation
- Geographic diversity helps smooth returns
- Internally managed, meaning BBGI’s scale leads to a clear cost advantage and team fully aligned with shareholders
- Discount to NAV could widen yet further
- Geographic diversity means FX movements will affect cash flows (for good or bad), but hedging activity should protect the portfolio (an adverse 10% movement of all currencies against GBP would only impact NAV by 3%)
- Portfolio is made up of illiquid investments