BBGI Global Infrastructure 23 October 2024
Disclaimer
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) owns a globally diversified portfolio of low-risk availability-based infrastructure projects, focussed on highly rated infrastructure investment destinations such as the UK, Canada, Continental Europe, Australia, and the US, with AAA/AA credit ratings. The trust currently yields c. 6.6%, while comparable government bonds yield c. 4%. Unlike fixed-rate government bonds, the Portfolio has contractual links to inflation and BBGI has achieved a progressive dividend since its IPO in 2011, while the team estimate that even with no further investments, the trust could continue with a progressive Dividend for another 15 years.
The current Discount of c. 12% is narrower than the peer group average of 15%. Over the last five years, BBGI's NAV total return of 43% has exceeded the peer group average of 26%. Annualised dividend growth since IPO in 2011 is 3.4%. In 2023 BBGI grew its dividend by 6% and is on target to do the same again in the year to 31/12/2024, illustrating the benefit of its inflation-linked contracts and the defensive nature of the portfolio. Since IPO, BBGI’s 8.5% annualised NAV total return is comfortably ahead of its long-term 7-8% target return.
BBGI is net cash at a company level, although as is usually the case with infrastructure assets, individual assets are geared. In almost all cases BBGI’s portfolio assets are geared using fixed-rate debt that amortises over the life of the specific asset and thus there is almost no refinancing risk.
BBGI is internally managed, meaning that the Management team are all employees of the trust, and it is their sole focus. It also means BBGI has relatively low Charges compared to the peer group.
Inflation linkages, explicit or implicit, are not uncommon in infrastructure investing. BBGI’s linkages are explicit, and with a diversified portfolio of low-risk availability assets, coupled with largely fixed-rate debt at an asset level, the resulting increases in income have flowed through to strong dividend increases. Overall, we think this outcome is evidence that BBGI occupies the low end of the risk spectrum in its peer group. While we imagine investors won’t have welcomed BBGI’s discount to NAV, the absolute level is lower than the peer group average, which we think is a reflection of the confidence its shareholders have in the strategy, something we look at in the Discount section. Another perspective on the discount is that it is too wide, undervaluing the assets. We also highlight some data that supports this in the Portfolio section, which shows that the discount rate implied by the portfolio valuation has returned to its long-term average, and after factoring in the discount to NAV, is well above.
BBGI's internally managed structure aligns management’s interest with that of the shareholders. For example, traditional investment trusts which are managed by an external manager have their fees based on a percentage of assets under management (AuM) i.e. the manager earns more if the trust grows, and thus has an incentive to continue to grow the AuM or have multiple funds to manage. There's no doubt in our minds that very often, growing trusts is a good thing, as scale brings many benefits, but in a tougher environment, investors know that BBGI's team don't have competing interests elsewhere to raise new capital and can stay focussed on the existing portfolio.
Bull
- Strong track record of beating target returns and paying a progressive dividend
- Inflation linkages have shown their worth in recent years, with dividend growth at twice the long-term average rate
- Internal management structure has resulted in lower costs than the peer group and creates an alignment of interest with shareholders
Bear
- There are wider discounts in other infrastructure trusts
- With inflation abating investors should expect less inflation-linked dividend growth in future
- Overall investor sentiment towards infrastructure trusts remains weak