Last year created some challenging conditions for infrastructure investment trusts, with sentiment towards the space reaching a low ebb during the first half of 2018.
As analysts at Numis Securities pointed out, issues like the Labour Party’s suggestion that areas such as railways, water and energy should be nationalised as well as the focus on counterparty risk sparked by the collapse of outsourcing giant Carillion caused investors to avoid infrastructure investments.
However, Numis added: “Discounts proved short lived as the takeover of John Laing Infrastructure at a 20 per cent premium to net asset value [NAV] led to a re-rating, and in our view, highlighted the peer group’s conservative portfolio valuations.”
The IT Infrastructure sector is currently trading on an average premium to NAV of 12.4 per cent and none of its six members are on a discount. In their 2019 outlook, Numis analysts highlighted what they think are the most attractive options in the infrastructure space.
Performance of trust vs sector over 10yrs
Source: FE Analytics
The group’s core recommendation is International Public Partnerships, based on its primary origination capability and its high inflation correlation.
Numis places great emphasis on the understanding the different origination strategies of infrastructure investment trusts and said that International Public Partnerships benefits from the strong origination capabilities of its manager, Amber Infrastructure.
“Amber has a preference for being the primary owner of equity, enabling it to decide key contract terms. Unlike acquiring assets in the secondary market, price is not always the only driver of winning a project,” the analysts said.
“This approach has facilitated access to less competitive areas and has enabled International Public Partnerships to collaborate on innovative infrastructure procurement methods.
“Notably, International Public Partnerships was one of the first investors in the OFTO sector [which covers the transmission of electricity generated by offshore wind farms], is a co-investor alongside the UK government in its Digital Infrastructure fund and a key part of the innovative Education Aggregator project.”
The analysts also noted that there is potential for NAV progression once the next portfolio valuation takes place. The trust’s most recent key valuation assumptions did not reflect the John Laing acquisition because it happened after the balance sheet date, but it did lead a re-rating in the rest of the space.
International Public Partnerships has ongoing charges of 1.48 per cent, is trading on a 7.5 per cent premium to NAV and yields 4.5 per cent.
Second on Numis’ list is HICL Infrastructure, which is also described as a ‘core’ buy because of its attractive long-term cashflows.
Performance of trust vs sector over 10yrs
Source: FE Analytics
The broker pointed out that HICL’s interim results for the six months to 30 September 2018 were “strong”, which offers reassurance on the quality and predictability of the trust’s cashflows.
It also noted that the trust’s management has offered an honest review of the key issues that negatively impacted HICL’s share price performance last year.
“We have been comforted on a number of points including low risk of early termination, as well writing back some of the previous adjustments made to former Carillion assets,” analysts said.
“We also feel that much of the bad news is out in respect of its Affinity Water investment, suggesting that NAV total returns should remain stable. Accordingly, we retain HICL on our recommended list reflecting its attractive valuation compared with the more expensive BBGI.”
HICL Infrastructure has ongoing charges of 1.26 per cent, is trading on a 6.5 per cent premium and yields 4.9 per cent.
Numis also has two infrastructure trusts that reside in the IT Infrastructure – Renewable Energy sector among its 2019 recommendations: Bluefield Solar Income and Greencoat UK Wind. Both are deemed ‘core’ buys thanks to being pure plays on their respective niches.
“We are attracted to Bluefield Solar Income’s strong pricing discipline, which has led to the manager building a high-quality portfolio which has delivered strong cash flows against a volatile power price backdrop,” Numis said.
“This has resulted in the highest dividend payment of the peer group, with the manager exceeding its stated dividend target in three of the last five years.”
The broker also argued that the trust’s current premium reflects quality of the business, while there is scope for the NAV to grow into this as the manager works to optimise the portfolio’s value through measures such as assumed asset life extensions.
Performance of trusts vs sector over 5yrs
Source: FE Analytics
When it comes to Greencoat UK Wind, Numis also likes the fact that it is a high-quality business.
Analysts added: “The fund has a simple and low geared capital structure, albeit shorter in term than the wider peer group (5.9 years average maturity).
“Although the shorter-term, interest only nature of the facility potentially leaves it exposed to refinance risk, the manager is confident that the quality of the asset base remains a key attraction to potential lenders.”
Bluefield Solar Income has ongoing charges of 1.05 per cent, is trading on a 16.2 per cent premium and yields 6 per cent. Greencoat UK Wind’s ongoing charges are 1.28 per cent while it trades at a 10 per cent premium to NAV and yields 5.2 per cent.