Due to BIP’s short operating history, this report will differ from my usual analysis format. Also, please note that BIP is a distribution-paying partnership, which is similar to but not technically a dividend-paying stock.
Brookfield Infrastructure Partners is a relatively small collection of high-quality global infrastructure assets.
-Distribution Yield: 6.1%
-Distribution Growth: 3.77%, with projected 3-7% distribution growth going forward.
-The partnership has operating units in North America, South America, Europe, Asia, and Australia.
-I think BIP is attractively valued for the long term as long as it remains under $20.
Brookfield Infrastructure Partners, L.P. (BIP) is a publicly traded partnership that was spun off from Brookfield Asset Management (BAM). The structure of BIP is a bit complicated. Brookfield Infrastructure Partners (BIP) owns 59% of Brookfield Infrastructure, with BAM and affiliates owning the remaining portion of Brookfield Infrastructure. This can complicate financial analysis. Partnership units for Brookfield Infrastructure are exchangeable into units for Brookfield Infrastructure Partners on a one-to-one basis, so all per-unit calculations are consistent.
Brookfield Infrastructure’s businesses are, as you could have guessed by the name, all about infrastructure. They own (or hold a joint venture with) the following infrastructure:
Transelec- Electric transmission lines in Chile
NGPL- Natural gas storage and pipeline in the US
Powerco- Electricity and gas distribution in New Zealand
IEG- Electricity and natural gas connections in UK
Ontario Transmission- Electric transmission lines in Canada
TGN- The only natural gas distributor in Tasmania
DBCT- Coal terminal that supplies port export services from Australia
WestNet Rail- Australian rail infrastructure
PD Ports- Collection of shipping ports in UK
Euroports- Ports in Europe and China
Island Timberlands- timberland in British Columbia
Longview Timber- timberland in Northwestern US
Peterborough Hospital- UK hospital
Long Bay Forensic and Prison Hospitals- Australian hospital
Royal Melbourne Showgrounds- Exhibition Center in Australia
The advantage of a publicly traded partnership over a corporation is that a partnership is not subject to as much double taxation as corporations are. When a corporation makes a profit, they are heavily taxed on that profit. Then, out of their after-tax profit, they may pay dividends to shareholders, and the shareholders then have to pay taxes on those dividends. So each dollar of a dividend is taxed twice- once at the corporate level and once at the shareholder level. BIP is a partnership and so is a flow-through entity. Unit-holders of a partnership pay taxes on their portion of the income. This way, earnings are only taxed once- at the individual level. It’s usually advantageous to be a partnership over a corporation, but the law only allows certain types of entities to become partnerships.
Since BIP is a partnership, it means you’ll receive tax advantages as a unitholder compared to a shareholder in a corporation. Your income will be taxed less, and your taxes will be partially deferred (which is good, because you can use that money for compounding until you pay it). The disadvantage is that it complicates your taxes because you need to file an additional form. Also, some tax-advantaged accounts do not work well with partnerships, so partnership units are often better kept in taxable broker accounts.
2009 was a big acquisition year for BIP. In the year, BIP invested $941 million in a recapitalization of Prime Infrastructure, and so purchased big stakes in Prime Infrastructure, the above ports, and the Australian positions of DCBT and WestNet Rail. BIP management consists of a bunch of value investors, picking up quality assets from troubled situations.
Current and Target Diversification:
BIP’s Current Segment Diversification of assets is as follows:
BIP’s Target Segment Diversification assets is:
Renewable Energy: 25%
Timber and Other: 20%
BIP’s Global Distribution of assets is as follows:
North America: 32%
South America: 11%
BIP’s Target Global Distribution of assets is as follows:
North America: 40%
South America: 20%
As of the 2009 year-end report, Brookfield Infrastructure currently has $58 million in cash on hand.
Net Operating Income (NOI) for 2009 was $47.8 million compared to $28 million in 2008. Adjusted Net Operating Income (ANOI), which is adjusted for depreciation, depletion, amortization, and other items, for 2009 was $117.4 million compared to $59.7 million in 2008. The 2009 ANOI figure, however, includes a $68 million sale, so BIP actually had rather soft performance in 2009 (particularly due to losses in their lumber segments).
NOI per unit was $1 and ANOI per unit was $2.45 for 2009. The current price per unit is $18.30.
Assets increased dramatically in 2009 to $4.7 billion from $1.8 billion. Debt also increased to $2.9 billion from $0.96 billion. This is due to BIP’s chain of acquisitions, as they saw a huge deal in the debt-laden Prime Infrastructure and went all-in.
BIP currently pays cash distributions (similar to dividends) of $0.275 per unit per quarter, or $1.10 per unit per year. As of this writing, that is a 6.1% distribution yield. Through 2009, BIP paid $0.265 per unit per quarter, or $1.06 per unit per year. This represents a 3.77% increase in distributions along with a high distribution yield. Management expects to grow the distribution by 3-7% going forward and pay out 60-70% of Adjusted Net Operating Income, which combined with the current distribution yield, should create a very good return over the years.
BIP represents a good opportunity to invest in high quality, safe, cash-generating assets like utilities while also buying infrastructure like ports and timber that are currently facing economic problems and should have great upside potential when the economy heats up.
Their timber segments are operating at a loss at the moment, and even so, BIP’s total income is secure. When the timber and ports experience a turn-around, total partnership profitability should increase dramatically, and until then, you can collect a considerable and growing distribution. The Timber segment posted a NOI loss of $26 million, and an ANOI loss of $2.6 million, in 2009. This is down from a positive ANOI of $26.5 million back in 2006 before the housing crash. BIP is currently harvesting at 60% long-term sustainable yield due to weak prices and demand, and plans to harvest at 120% long-term sustainable yield for 10 years once prices return. If BIP can get their timber segment’s ANOI back up to 2006 levels, that will represent over a 20% increase in total ANOI. So this segment alone represents considerable upside and is buffered on the low side by their safe utilities.
I particularly like their Australian infrastructure. Their coal export terminal, DCBT, in northeastern Austrailia serves Japan, Korea, China, and India, so they have direct access to emerging economic powerhouses. BIP is currently evaluating strategies to expand DCBT as the demand is so high. DCBT currently has a capacity of 85 million tonnes per annum, and BIP estimates that for each 5% increase in capacity, an investment of $250 million would be necessary. This represents an excellent place for BIP to allocate capital should they choose to do so.
In western Austrailia, BIP holds Westnet Rail, which transported over 50 million tonnes of freight in 2009. The region is encountering increased commodities demand from China, and so several iron-ore mining developments are being developed in proximity to Westnet Rail. BIP expects to invest upwards of $200 million to accommodate these developments and therefore increase cash flow.
BIP has elements of both risk and safety. On one hand, they hold necessary infrastructure like utilities, and they have long-term profitable contracts and giant economic moats around their businesses. On the other hand, they are rather leveraged due to their intense acquisition investments in 2009. BIP is safe for now, is profitable, and should become even more profitable as the world economy recovers, but with debt, there is an element of caution. One thing I like is that their risk is so spread out on almost every continent and several countries, so it’s unlikely that any single event would be large enough to dramatically affect their operations as a whole. In the event of another world-wide recession, however, BIP would face stiff challenges.
Conclusion and Valuation
Investing in BIP gives you tax advantages, an over 6% distribution yield, high-caliber management, great infrastructure assets with elements of both stability and growth, and global exposure (especially to Asia). It could take a while for their timber and port segments to heat back up, but there’s no rush and I’d rather invest too early than too late, especially since I can collect the distribution. I love the fact that BIP already has several defined areas of potential investment and growth over the next few years, like DCBT and Westnet Rail expansions. BIP is also supported by BAM, giving it a competitive edge and added stability.
If you have a long-term investing mindset, BIP is worth a serious look. I think BIP is attractive under $20.
Full Disclosure: I own shares of BIP.
You can see my full list of individual holdings here.
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