Brookfield Infrastructure Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Brookfield Infrastructure Corporation (BIPC) is a global infrastructure company, focusing on long-life assets that generate stable cash flows, including utilities, transportation, midstream, and data infrastructure, offering services and operations across diverse geographies.

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 global infrastructure portfolio.

  • Revenues Distribution: BIPC’s revenues are primarily generated through regulated utilities, transportation, midstream, and data infrastructure businesses. They provide contracted services and have a large portion of revenues from government-regulated assets.
  • The business focuses on long-lived, high-quality assets, including utilities, transportation, midstream, and data infrastructure across various geographic regions
  • Industry Trends: The infrastructure industry is characterized by high capital intensity, long asset lives, and regulated or contracted revenue streams. Trends include increased investment in renewable energy infrastructure, fiber-optic networks, and data centers. Additionally, a focus on ESG factors and sustainability has led to increased investments in energy transition assets.
  • Margins: BIPC typically reports robust operating margins, often attributed to its contracted or regulated revenue streams. Profitability varies across operating segments based on their operational characteristics, but is generally stable and predictable. The company aims to maintain consistent margins while optimizing their operating costs.
  • Competitive Landscape: The infrastructure landscape is marked by a few well-established players. BIPC competes based on specialized knowledge, access to capital, operational expertise, and strong regulatory relationships. It is a highly competitive market with a number of competitors and a small number of key players.
  • What Makes BIPC Different: BIPC differentiates itself through its scale and diversity of operations and geographies, and through its focus on long-life, essential infrastructure assets with predictable cash flows. They leverage Brookfield’s operational expertise and financial strength to add value, and seek to achieve long-term returns on capital, not for short-term performance boosts. They also focus on a “buy, fix, sell” strategy with assets where they can deploy expertise to increase value.
  • Recent Concerns / Controversies/Problems: Recent geopolitical events, especially the war in Ukraine, has led to increased volatility and complexity in supply chain. Interest rates are also a key risk, and they might affect the ability to acquire projects. Additionally, the effects of inflation and changes in foreign exchange can lead to lower profitability.
    • BIPC has been exposed to credit and counterparty risk, although it states those risks are “largely mitigated” or “appropriately structured”. The company also mentioned the uncertainty of government action and regulatory changes.
  • BIPC has also said in their latest earnings call that their capital deployment is being done in a “very risk-averse” way.

Financials In-Depth

BIPC’s financial performance is stable and consistent due to long term contracts and government regulation, but it has some volatility.

  • Revenue and Growth: BIPC’s revenues are driven by the demand for essential services, like electricity, gas, toll roads and ports, and data infrastructure. They are often subject to long-term contracts, which lead to stable income.
    • Revenues for the quarter ended December 31, 2022 were at $1.6B (USD), up 11% from the same quarter last year (adjusted for currency exchange rates).
    • For full-year 2022 revenues came in at $6.0B (USD), up 7% from $5.6B (USD) in 2021 (adjusted for currency exchange rates)
  • Operating Profit: BIPC has high operating profits, thanks to its regulated or contracted nature. The high fixed costs of infrastructure assets lead to high operating margins once assets become operational.
    • Operating expenses for the year ended December 31, 2022 were at $4.6B, compared to $3.7B last year and $3.0B in 2020, as the company’s operations have grown.
  • Return on Invested Capital (ROIC): BIPC’s ROIC is a good measure of its overall performance. ROIC is a good metric for capital allocation.
    • The company reports its return on invested capital in its earnings call, noting a decrease in ROIC to 10% in 2022 from 14% in 2021. However, they stated the ROIC in the business is still attractive.
  • Cash Flow: The ability to generate predictable free cash flow (FCF) is a major plus of BIPC, which is used for dividend payments, acquisitions, and debt repayments.
  • BIPC has strong cashflows, for example, for the year ended December 31, 2022, the FCF came in at $1.86B, versus $1.76B for the year ended December 31, 2021.
  • Capital Expenditures: BIPC spends money on capital expenditures as required to maintain the asset bases and make upgrades, as well as further growth. However, it is more or less predictable as it follows a consistent and predictable pattern. *Capital expenditures are generally a sizable part of their operating activities, as reflected in the financials. In 2022, their capital expenditure was $1.7B, vs $2.1B in 2021.
  • Capital Structure: BIPC has used both debt and equity financing, but the capital structure is not static. The company has been targeting a debt to equity ratio of 0.3, but has recently exceeded that target, and plans to lower the leverage through cash flow over time. *BIPC’s debt structure contains large quantities of non-recourse debt, meaning that BIPC is not liable if projects run into problems.
  • Debt: BIPC has total debt of $14.4B, which includes $10.2B in non-recourse borrowings. For the year ended December 31, 2022, the company repaid $1.8B (USD) of principal, and borrowed another $2.4B (USD) in new borrowings. They have been targeting a debt-to-equity ratio of 0.3 but due to acquisitions the company had to take on more debt. The debt has a weighted interest rate of 5.6 percent.
  • Equity: BIPC’s equity stood at $11.7B on December 31, 2022. This consists of the exchangeable shares the partnership uses.

Understandability

BIPC’s business model is relatively straightforward but its financial statements are complicated, requiring some financial expertise for analysis. The long-term agreements and revenue stability make it easier to understand how BIPC earns revenue.

  • The multi-geography and multi-business nature of the company can make it hard to understand and see a bigger picture, especially when considering the complex partnership structure.
  • While cash flows are predictable, there are several accounting intricacies and adjustments that need to be taken into consideration, like foreign exchange impacts, debt, and capital expenditures. For a truly in-depth analysis, this might require financial expertise.
  • Though some segments can be easily analyzed individually, their performance must be analyzed as part of the entire group. Understanding the macro-economic and political impacts of different geographies and how different regions act during good times and bad times are critical to understanding how the company is valued as a whole.

Balance Sheet Health

BIPC’s financial health is strong, but it must be monitored closely for risks and debt levels, particularly in the current volatile economic environment.

  • BIPC has good liquidity, meaning it can cover short-term obligations. The company uses a diversified portfolio of debt in multiple currencies and maturities, which minimizes risks and protects the business against interest-rate fluctuations.

  • The company has a high level of debt, with total debt of $14.4B, which is a risk in the higher-interest rate environment. They aim to lower their debt levels by cutting back on their capital expenditures, but if those plans fail, it could pose an adverse risk for the company.
  • However, they are able to maintain a positive net income, and are mostly generating excess cashflow over operating expenditures and debt expenses. This should provide flexibility in case of future economic turmoil.
  • The strong cashflows will help management to repay the debt levels and to continue the dividend payouts.

Moat Assessment

BIPC has a narrow economic moat, receiving a 3 out of 5 rating on the moat scale.

  • Intangible Assets: BIPC has strong relationships with regulatory agencies and has long experience of working with these partners, as well as an extensive experience in the infrastructure business. This allows for a relatively easy access to high quality deals, and also acts as a barrier to entry. It has specialized knowledge and a lot of industry contacts and relationships, which give them a slight advantage over other players in the field.

  • However, some of their businesses might be easily replicated with a similar type of business model and management strategy, and the regulation may not be a long-lasting competitive advantage.

  • Cost Advantages: Through access to vast pools of capital and financial resources, BIPC has the possibility to achieve scale advantages, and it’s a key point for them to get better deals and prices on their acquisitions. Also, having a global portfolio of infrastructure assets makes the company more resilient to downturns in individual regions.
    • However, those economies of scale do not come from a very high profit-margin business.
  • Switching Costs: Some of BIPC’s business, particularly midstream and utilities, benefit from high switching costs for customers, as the cost of leaving the service is quite high and it’s easier for them to continue with the existing provider rather than switching to a competitor.

  • On the other hand, this is not the case for all their businesses, with some of them having little to no switching costs. For example, the infrastructure business has a lot of other players, and it would be very easy for their clients to leave for another company, should they provide a better price point.

  • Network Effects: While some of BIPC’s businesses, such as transportation and telecommunications, have a network structure, it is not necessarily the main driver for growth or sustainability. For example, telecom has a multitude of different competitors, and the network effects are not necessarily as strong as in pure technology firms.

Risks to the Moat and Business Resilience

Despite BIPC’s overall strong positioning, it faces several risks that could erode its moat and hinder business resilience.

  • Regulatory Changes: BIPC’s revenue streams and profitability are heavily influenced by government regulations. Changes in regulatory frameworks can significantly impact BIPC’s pricing power and profitability.
  • Macroeconomic Risks: BIPC is exposed to broader macroeconomic risks including changes in interest rates, inflation and currency volatility. These factors can impact capital costs and investment decisions. In addition, the company is also exposed to geopolitical tensions, and they are not immune to such events.
  • Competition: Competition in the infrastructure sector is intense, with many large players vying for the same investment opportunities. BIPC’s ability to consistently find and secure favorable acquisitions and operating contracts can be tested as more competitors arrive on the scene.
  • Technological Disruptions: Technology can create new and improved alternatives to the existing infrastructure assets, thus making the existing assets obsolete. For example, new battery storage and micro-grids can challenge the traditional regulated utilities, leading to less profits for the companies.
  • Operational Risk: BIPC’s business requires a high level of expertise to maintain and operate the assets. Any lapses in their expertise could lead to reduced profit margins and poor performance, or even incidents and accidents. The company is also exposed to cybersecurity risks, which could significantly affect BIPC’s assets and their operations.
  • Acquisition Risk: BIPC is growing both by organic growth and acquisitions, the latter being an important part of the growth strategy, but poor or pricey acquisitions can destroy shareholder value. Any deal that does not make economic sense might impact future performance and margins. Additionally, they also need to ensure a smooth integration, as integration problems with newly acquired assets could lead to lower profitability and slower growth.

BIPC seems well-positioned within the infrastructure business with a moderate economic moat, as well as having a good level of liquidity and strong predictable cashflows, but should be monitored carefully for certain risks and challenges.