We’re Constructive on Brookfield Infrastructure

Rare is it to find a great business that simultaneously trades at an inexpensive valuation. Often, inexpensive stocks are cheap for a reason while high quality businesses accompany nosebleed valuations.

We’re constructive on Brookfield Infrastructure Corporation (“BIPC”), a stock we purchased for suitable client portfolios at CAD$42.77/share last month.

As its name suggests, BIPC has its hands in transportation (rails, toll roads, and ports); utilities with contracted revenues; transmission and storage; and the data infrastructure that is needed for digitization. Within private markets, infrastructure is one of the fastest growing segments. Not only has government debt ballooned out of control but the need to make capital investments as well as replace existing public assets is evident on all corners of the globe.

The management team has a proven track record of successfully navigating difficult environments. Over the last decade, the cash flow that BIPC generates each year has tripled. In fact, there’s not a single year in that period when BIPC generated less cash flow compared to the year before, and that even includes the pandemic.

In the long run, management aims for a 12-15% internal rate of return while growing its dividend by 5-9% each year. Currently, the dividend yield is almost 5%. In the most recent quarter, the company grew 7% organically after taking out non-recurring items (like acquisitions and divestitures) compared to the year before.

To accommodate the expected proliferation in artificial intelligence and electrification, infrastructure investments are clearly required. Currently, 30% of BIPC’s cash flow is leveraged to decarbonization and digitization, a percentage sure to increase over time. About 80% of its capital project backlog and acquisition pipeline relates to these themes as well.

The stock price, which trades around CAD$48/share, is almost 30% off the April 2022 all-time high. While higher interest rates reduced its valuation, BIPC has very predictable cash flow. Not only is 65% indexed to inflation, but 90% is contracted and 70% isn’t even sensitive to price changes. BIPC hedges 80% of their cash flow to U.S. dollars, so a weaker loonie would benefit us Canadian shareholders.

While BIPC trades at a 15% discount to its historical valuation, we expect this gap to narrow as interest rates begin to fall. Once rates return to normal, which we believe to be 150 to 200 basis points lower than today’s level, we believe BIPC will trade at a premium to its historical average valuation multiple because of the evident need for infrastructure development.