3i Infrastructure (3IN) – A Brexit-proof investment for turbulent times
3i Infrastructure (3IN) is a closed-end investment company that shows up on a screen I use to identify dividend-payers with good quality and value metrics.
It invests in developed markets around the world through companies involved in economic infrastructure and greenfield projects with a geographical spread as shown below:
|UK and Ireland||51%|
|Continental Europe & Singapore||47%|
Over the last twelve months, its share price has strongly outperformed the wider market, rising from a low of 195.6p (latest share price 262.45p, market cap £2,127 million).
Investors willing to a pay premium for management
For the last decade or so, 3IN traded at a discount to its NAV. That changed earlier this year. The premium for the last twelve months averages at 4% but at the moment is around 12%, showing how investors currently feel about what management are doing.
I’ve compared 3IN to three similar companies (see the table below). At this moment in time, investors are willing to pay a premium to NAV for the infrastructure sector in general. It could be argued that GCP Infrastructure offers a better choice with a higher dividend yield and lower premium but more digging needs to be done before anyone should draw that conclusion and in any case it is not the subject of this article.
HICL Infrastructure, for example, although currently having a higher dividend yield, has only produced a total return of 9.5% since its flotation in 2006 (partly due the hit of around £59m it took from Carillion’s collapse).
3IN versus its peers
|Name||Dividend Yield||Premium/Discount||12m average|
|BBGI SICAV SA||4.22%||15.17%||5.21%|
H1 2018 numbers
3i Infrastructure has a stated objective to provide shareholders with a sustainable total return of 8%-10% each year, and a progressive dividend policy.
According to the results for the six months ending 30 September 2018, 3IN achieved its stated aim by increasing its return on investments from 7.1% to 9.3%.
NAV per share also increased by 28% in the twelve months to 30 September 2018.
|Six months ending 30/9/18||Six months ending 30/9/17|
|NAV per share||226.4p||177.0p|
|Total return %||9.3%||7.1%|
|Interim dividend per share||4.325p||3.925p|
Looking at the quality metrics gives a reassuring image of safety. Long term ROCE now averages 13.7%, long term average free cash flow to assets is 8.2x and both the F-scores and Z-scores are good at 7.0 & 21.0 respectively.
In terms of valuation the forward P/E ratio currently sits at around 11.5x. The recent share price increase has however, affected the price to book ratio which is now 1.12.
Brexit and other risks
Global spending on infrastructure is expected to increase by 6% to 10% annually over the medium term. But what can we expect in 2019?
While the terms on which the UK finally leaves the EU remain uncertain, 3i Infrastructure says that the majority of its investments are in domestic businesses with limited cross-border trade, and is therefore unconcerned about a no-deal Brexit.
On the other hand, interest rate rises in the UK and Continental Europe could reduce demand for projects and may also reduce the valuations of its underlying assets.
The company refinanced a £300m revolving credit facility in April of this year, which seems a very smart move. This facility runs until May 2021 and as at September 30th it had utilised less than £17m.
Political risk comes in the form of long term public sector projects which may be terminated early in an effort to reduce government spending.
I have taken a long position in 3IN with a view to it being a long-term holding in my portfolio. The world’s infrastructure will still need developing regardless of what happens with Brexit and the Chinese/American trade stand-off. 3IN’s managers look to be making a good job of backing the right projects and the current valuation and quality measurements give me confidence that the company will be able to cope with a turbulent 2019.
At the time of publication, the author holds a long position in 3IN.