Brookfield Infrastructure Partners

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 3/5

Brookfield Infrastructure Partners is a global infrastructure company that owns and operates assets across a diverse range of sectors, including utilities, transport, midstream, and data infrastructure, aiming to deliver long-term sustainable returns for its investors.

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.

Brookfield Infrastructure Partners (BIP) does not have a wide or durable economic moat, rating at a 3/5 due to the nature of their assets.

  • Network Effect: Some of their assets, such as pipelines and data infrastructure, exhibit some network effects where the value increases with the number of users or connections.
  • Intangible Assets: There aren’t significant advantages from traditional intangible assets like brands or patents.
  • Switching Costs: Switching costs are present in some regulated businesses such as utilities, as customers are likely to stay with the existing provider, or in certain transportation businesses.
  • Cost Advantage: The company leverages cost advantages from their scale in some businesses as well as their technical capabilities. But they have no consistent cost advantage across all their businesses.

The moat is not as wide as those seen in companies with significant intangible assets or very strong network effects. It is more of a collection of somewhat advantageous positions, creating a composite moat, rather than individual strong moats. The company is constantly investing in new infrastructure assets, some of which have higher moats than others, so the strength of the moat may improve or erode over time.

Risks to the Moat and Business Resilience:

  1. Regulatory Changes: As a significant portion of BIP’s businesses operates in regulated industries, changes in regulatory frameworks can severely impact their pricing power and profitability. For instance, government authorities can limit the rates charged by their utility companies, potentially impacting future cash flow.
  2. Technological Disruption: New technologies or more efficient approaches can render certain types of infrastructure assets obsolete, such as the displacement of traditional pipelines and storage by alternative sources. Competition from new technologies may make some of its existing assets worth less.
  3. Operational Issues: The business model requires high operating margins and low maintenance, if operating issues arise they could directly affect the revenue as the firm is dependent on operational assets. Infrastructure can be impacted by various events such as natural disasters.
  4. Interest Rate Risk: As a capital-intensive company, BIP relies on debt for much of its financing. Fluctuations in interest rates can increase their financing costs, reducing their overall profitability, and leading to a larger need for equity. The current high-interest rate environment is a concern as the company may have to refinance debt at much higher rates.
  5. Economic Downturns: A slowdown in economic growth could reduce the demand for their services, affecting volumes in the transportation and midstream sectors. A recession could also reduce demand for electricity, putting a strain on their results.
  6. Execution Risks from Acquisitions: Growth is an important part of BIP’s strategy and is driven by organic growth and acquisitions. However, acquisitions are not a guaranteed positive move and carry a lot of execution risk. They can make the company less efficient and might affect long-term returns. If acquisitions turn out badly it will reduce value.

Business Explanation:

Brookfield Infrastructure Partners (BIP) is a global infrastructure company that owns and operates assets across a diverse range of sectors, including:

  • Utilities: This includes regulated assets like electricity and gas transmission and distribution networks. These businesses usually offer stable, long-term revenue streams.
  • Transport: BIP owns and operates transportation infrastructure like rail networks, ports, and toll roads. This area is dependent on trade volume and economic activity.
  • Midstream: This includes infrastructure that transports, stores, and processes energy products, such as natural gas and crude oil. Earnings here are closely related to energy supply and demand.
  • Data Infrastructure: This growing sector comprises cell towers, data centers, and fiber optic networks. It is dependent on data consumption and the expansion of mobile networks.

BIP’s revenue is diversified across these sectors and geographies. Their business model is to invest in infrastructure assets that generate reliable cash flows over a long period. They aim to increase revenue through organic growth, which involves increasing prices and volumes, and by adding new acquisitions. A key component of their strategy is to actively manage their portfolio by recycling capital through selling assets and reinvesting in new opportunities, aiming to increase returns. They also look for value and special situations and like to buy businesses that have underappreciated earnings power, which they can improve.

Financials:

  • Revenues: BIP’s revenue is diversified across different sectors. Their revenue is primarily recurring in nature, with 90% of it contracted or regulated. The company also generates revenue from fees in some businesses.
  • Margins: Operating margins vary considerably across sectors, ranging from low single digits in some businesses to the 30-50% range in others. They aim to maintain or improve margins through operational efficiency.
  • Cash Flow: They generate significant operating cash flow which is used to fund new capital investments, but also to increase distributions to shareholders. Free cash flow has fluctuated as the company reinvests heavily for growth. Management has communicated that, while acquisitions are a way of growth, the first objective is to get good cash flow.
  • Capital Structure: BIP utilizes a blend of equity and debt in their capital structure. Since they utilize debt, they are sensitive to changes in interest rates.
  • Leverage: They have a high leverage, which they try to stabilize by maintaining a target debt-to-value ratio. High debt can increase risks in a high-interest environment.
  • Dividends: The company is a cash-flow-heavy business and has consistently increased dividend payments over the years. They also tend to increase their dividend yield.
  • Growth: They are actively looking to grow through acquisitions while also reinvesting heavily in the business for organic growth. Management expects to grow the distributable funds by at least 5% per year.
  • Debt: The company has a high level of debt that has been trending down over the last few years. They are also trying to improve their credit rating and are moving to an investment grade rating.

Recent Concerns and Controversies

  • Interest Rate Environment: Management has communicated concern about higher interest rates, however, most of their debt is fixed.
  • Asset Sales: In some cases the company has sold assets to repay debt, sometimes this resulted in write-downs and has negatively affected the stock price in the short term.
  • Acquisition Prices: Some investors have worried that the company may be overpaying for acquisitions as competition among buyers heats up. Management has communicated that they do not intend on buying businesses that are overvalued.

Understandability: 4/5

BIP’s business is complex due to its diverse holdings in multiple sectors and geographies, but at its core, the business model is easy to understand. It owns and operates infrastructure assets and makes money from selling services through these assets. The value creation process (through building and expanding assets to generate higher returns) is straightforward. However, certain elements add to the complexity such as the complex accounting due to the geographical and business diversity, the nuances of the regulatory environment in each region they operate, the details of the contracts they form with third parties, and the details of new acquisitions. This mix of operational and financial complexity makes the business slightly difficult to understand for a non-expert, but not incredibly hard to get a grasp on.

Balance Sheet Health: 3 / 5

BIP’s balance sheet is relatively healthy but carries substantial debt that should be watched carefully. The debt levels have come down slightly over the last few years and their assets are mostly predictable cash-generating assets. Their long-term debt maturity profile helps provide more stability. The company maintains a high debt ratio and has low cash balances that could make the company’s financial position more vulnerable in adverse environments. The positive is the company is trying to move to an investment-grade credit rating, which is a step in the right direction and would imply more financial flexibility.