Brookfield Infrastructure Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

Brookfield Infrastructure Corporation (BCUCY) is a global infrastructure company that owns and operates a diversified portfolio of assets in the utilities, transport, midstream, and data sectors.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Brookfield Infrastructure Corporation (BIPC) operates a diversified portfolio of infrastructure assets across various sectors, making it less vulnerable to disruptions in specific industries. BIPC generates revenues primarily through long-term, regulated, or contracted revenues, which offer a degree of revenue stability. The company operates four main segments:

  1. Utilities: This includes regulated distribution operations (such as electricity and gas), contracted power generation, and electricity transmission.
  2. Transport: This segment encompasses ports, railroads, and toll roads.
  3. Midstream: This includes natural gas transportation (pipelines) and storage.
  4. Data: This is a growing segment that focuses on data storage (data centers) and telecommunications infrastructure (cell towers and fiber optic networks).

Several trends shape the industries in which BIPC operates:

  • Infrastructure Investment: Governments and corporations worldwide are investing heavily in infrastructure development and renewal, creating strong tailwinds for the industry.
  • Data Growth: Demand for data storage and telecommunications infrastructure is growing due to increasing data usage.
  • Regulatory Stability: Many of BIPC’s assets are regulated, which offers predictable returns and a level of stability in revenues.
  • Essential Services: The services provided by BIPC are generally essential, and demand tends to be relatively inelastic, offering some protection against economic downturns.

Moat Assessment: 3 / 5

BIPC possesses a narrow moat. Here’s a detailed breakdown: Sources of Moat:

  1. Scale & Cost Advantages in Some Businesses: Certain assets, like distribution grids, are natural monopolies or have local barriers to entry. These provide some scale advantage, making it difficult for new entrants to compete.
  2. Barriers to Entry: Many of the assets BIPC operates require substantial capital investment and long permitting timelines. These factors raise significant barriers to entry for new competitors.
  3. Switching Costs: Some assets, particularly in the utilities and data sectors, benefit from high switching costs for customers, creating customer lock-in and greater pricing power.

Moat Strengths:

  • Essential Services: The essential nature of the infrastructure services can provide stable returns and protect against cyclical shifts.
  • Long-term Contracts: The contractual or regulated nature of revenue generation can support a steady income stream.
  • Diversification: Diversification across different sectors protects from volatility in one specific industry.

Moat Weaknesses:

  • Competition in Some Assets: BIPC also operates in sectors with considerable competition, like the telecom infrastructure sector.
  • Regulatory Changes: Although the regulated nature of some of BIPC’s businesses offers stable returns, regulators can also make adverse changes that hurt the business. For example, the company is facing headwinds in certain telecom markets.
  • Maintenance and Capital Expenditure Intensive: BIPC’s businesses are inherently capital-intensive to build and maintain, which is a constant drain on cash flows and could reduce its ability to generate free cash flows.

Legitimate Risks That Could Harm the Moat

Here are some risks that could harm BIPC’s competitive advantage:

  1. Regulatory Risks: Regulatory actions or changes can impact pricing, returns, and the viability of assets. Government policies and tax code changes can also have negative financial implications.
  2. Interest Rate Increases: Rising interest rates could significantly increase BIPC’s cost of debt, potentially lowering its profitability, and leading to capital allocation decisions not being as valuable.
  3. Technological Disruption: New technologies may render some of the company’s assets obsolete, requiring significant and potentially costly upgrades.
  4. Economic Downturn: Though demand for BIPC’s services is somewhat inelastic, an economic downturn could lead to lower growth rates, reduced customer demand, and challenges maintaining prices.
  5. Market Competition and Competitive Pressure: BIPC operates across a diverse range of industries, and while some of its assets offer high barriers to entry and monopolistic characteristics, the majority faces intense competition from other industry players. These other players might be able to reduce BIPC’s pricing power.
  6. Geopolitical Risk: BIPC operates across the globe, which exposes the business to various macroeconomic and political risks.

Business Resilience

BIPC has a robust infrastructure asset base and a long track record, but its resilience is not fully assured, because it’s reliant on its ability to invest profitably and retain high customer retention. A large portion of BIPC’s revenues are regulated and contracted, therefore, the majority of the revenues are safe during adverse economic conditions. But because the company is highly leveraged, any deterioration in performance could cause the leverage to have a negative effect. Also, because some of the sectors it operates on are very capital intensive, it must continuously make investments, putting a strain on its financials.

Financial Analysis

Here is an in-depth review of BIPC’s financials:

  • Revenue Trends: BIPC has demonstrated consistent revenue growth over the last few years.
  • Profit Margins: The operating margin has also increased. However, the profit margin of many segments has faced some pressure due to rising interest rates.
  • Return on Invested Capital (ROIC): BIPC’s ROIC has been declining since the last few years. The company is operating around a 9 percent ROIC as of 2023.
  • Capital Structure: BIPC has a complicated capital structure and significant debt on its balance sheets. This leverage may increase financial returns, but it also makes the company vulnerable to adverse economic conditions.
  • Valuation: The market assigns a reasonable premium to BIPC because of its stable long-term contracted and regulated assets. But this premium could quickly evaporate if the company fails to deliver on its expected performance.

BIPC reports results in US dollars, but derives the majority of its revenue in other currencies, thus, currency fluctuations may have an outsized impact on its reported results. Furthermore, to understand BIPC, one needs to understand the economic dynamics of each of its different operating divisions separately, then combine them into the larger enterprise, which can often become a daunting task.

Understandability Rating: 3 / 5

BIPC has a moderately complex business structure.

  • The asset classes BIPC operates within (utilities, transport, midstream, and data) are easy to understand separately, but the company as a whole becomes harder to evaluate because it operates in several different industries.
  • The sources of revenue (regulated and contracted) are straightforward.
  • The use of financial leverage and nonrecurring expenses can make it difficult to clearly see the underlying business performance.
  • The various types of operations add a layer of complexity.

Balance Sheet Health Rating: 3 / 5

BIPC has a decent, but leveraged balance sheet.

  • The long-term debt accounts for a large portion of its assets.
  • Although BIPC generates stable cash flows from its operations, which enable it to service its debts, it is still vulnerable to adverse market conditions.
  • The company also employs complex financial instruments to manage its assets and risks. While these tools may increase financial performance, they also make the company more vulnerable to any unforeseen problems and accounting mishaps.
  • Although the cash holdings are reasonable, they are not extremely high, especially when compared with the debt.

Recent Concerns

  • Interest Rate Hikes: The rise in interest rates is putting pressure on BIPC’s profitability, particularly in its capital-intensive businesses, as interest expenses on floating debt and refinancing become much higher.
  • Telecom Challenges: A number of issues are impacting BIPC’s telecom businesses. Macroeconomic factors in emerging markets are impacting earnings growth and pricing flexibility.
  • Asset Sales: To mitigate some of the concerns, BIPC is selling some of its assets. The company will be using some of the proceedings to pay down debts and bolster its balance sheet.

Conclusion

In conclusion, BCUCY is a global infrastructure company with a narrow moat and moderate risk exposure. While its essential services and long-term contracts provide a level of stability, the company is not invulnerable to risks such as regulatory changes, interest rate hikes, competition, and technological disruptions. Furthermore, the company’s high leverage means it has to work hard to retain those strong moats, as any misstep in maintaining its operating performance could have disastrous results. Even though it has various growth levers, especially in the data segment, its main challenge is to grow while keeping all its various stakeholders happy.