Patience Will Pay With Brookfield Infrastructure

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Summary

Brookfield Infrastructure holds cash-generating assets across a range of utility, transportation, and logistics sectors.

A large percentage of Brookfield's cash flow is tied to long-term contracts or regulatory determinations.

Weakness in emerging markets may make investors nervous, but it could create asset buying opportunities for Brookfield if there is meaningful capital flight.

Brookfield Infrastructure Partners L.P. (NYSE:BIP) is not for the investor looking for the quick three-bagger, nor the investor who wants a lot of flashy activity. What Brookfield Infrastructure is about is the patient allocation and investment of capital into protected businesses at prices that allow for superior long-term returns. There's a very large global base of potential assets out there, and I would look for 8% to 10% long-term annual returns from this level.

A Broad Collection Of Assets

Brookfield Infrastructure has over $5 billion of capital deployed around the world in cash flow-generating assets. Nearly 90% of the company's cash flow is tied to business where returns are regulated (about 47%) or contracted (42%), with 70% of it indexed to inflation and 60% not subject to volume risk (take-or-pay and other structures).

Utility operations account for 38% of Brookfield Infrastructure's capital, invested in regulated terminal operations, electricity transmission operations, and regulated distribution operations. The terminal operations is a large coal terminal facility in Australia that handles around 20% of the world's seaborne metalurgical coal. The transmission and distribution operations include nearly 10,000km of power transmission lines, including a network that covers most of Chile (including 100% of 500kV, 51% of 220kV, and 85% of 154kV lines), and regulated businesses that serve more than 2 million customers.

Transportation is nearly half of the partnership's capital (48%) and three-quarters of the segment's EBITDA is supported by long-term contracts or regulations. Brookfield Infrastructure holds a long-term lease to over 5,000 km of railroad track in south Western Australia, where I believe it owns the sole network. Brookfield Infrastructure also owns 28 port terminals in Europe, and two road businesses in Chile and Brazil, the latter of which operates 3,200 km of inter-urban toll roads.

Last is the energy business, which represents about 14% of the partnership's invested capital. This category includes a transmission, distribution, and storage business that holds significant natural gas transmission lines and storage capacity, and a "district energy" business that operates steam heating plants.

Like An MLP, But Not Exactly

Brookfield Infrastructure is an externally-managed limited partnership, managed by Brookfield Asset Management (NYSE:BAM) which also owns 30% of the units. While the structure here is similar to MLPs, it is not identical and there is no unrelated business taxable income to complicate taxes.

This partnership currently has a BBB+ rating from S&P, with only modest debt maturities over the next two years ($200 million and $300 million). Liquidity does not appear to be an issue, as the company has access to further debt funding if needed.

Patience, And Diversification, Should Pay Off

Brookfield Infrastructure runs itself on what I would call a "get rich slowly" basis - the company does not bid aggressively for assets (it generally avoids competitive auctions) and it will walk away when valuations aren't attractive. To that end, management has pointed out the large investing flows into infrastructure assets recently, making certain areas less attractive on a long-term returns basis. Management would also prefer to invest incremental capital into businesses it already knows, and areas like rail, regulated terminals and ports, toll roads, and pipelines could command organic growth capital in the coming years. This partnership is also willing to shuffle the deck, as the company sold out of its timber assets.

Brookfied Infrastructure's capital is spread around the world. South America accounts for 37% of the company's invested capital, with another 29% in Australasia. The remaining 34% is primarily invested in Europe (23%) and North America (11%). This exposure to emerging markets may worry some investors given the recent weakness in those regions, but it isn't likely to have a serious negative impact on Brookfield Infrastructure as toll roads and power lines are not going to see usage fall off as much. It's also worth remembering that Brookfield can be a long-term beneficiary of a downturn in the emerging market - if capital flees the area, the company can step up with its checkbook and acquire assets from motivated sellers.

Steady, Shielded Growth

Brookfield Infrastructure has structured its assets in such a way that its cash flows are shielded, at least in part, from volume declines or pricing but it is not risk-free. Adjusted EBITDA rose 17% in the fourth quarter, but the energy segment declined 11%. The utilities segment saw EBITDA rise 5% for the quarter, while the transport segment jumped 57% on a 10% improvement in toll road traffic and its Australian railroad assets reaching full operating utilization. With the strength seen in 2013, management raised the distribution by 12%, ahead of its long-term targeted growth rate.

The fourth quarter also saw two investments that follow that theme of doubling down in familiar businesses. Brookfield Infrastructure took a 27% interest in VLI, a Brazilian rail and ports logistics business controlled by Vale (NYSE:VALE), and a 49% stake in a subsidiary of Mitsui O.S.K. Lines that operates container terminals at the ports in LA and Oakland.

With these and similar deals in the future, I look for Brookfield Infrastructure to grow its cash flow at a long-term rate in the high single digits (8% to 9%). That is a little below management's long-term target of 10%, but it nevertheless supports an expected total return per year in the range of 8% to 10%. As an alternative measure of value, I'd point out that a 12x multiple to 2014 EBITDA (a reasonable multiple looking at a peer group of global port, infrastructure, transmission, and pipeline asset managers) supports a fair value of around $40.50 today.

The Bottom Line

The business has some vulnerability to the global economy, but with a good balance sheet and solid cash-generating assets, I would argue that even worse turbulence would be an opportunity to acquire good assets at good prices. Brookfield Infrastructure is not likely going to be an investment that generates substantial near-term capital gains, but rather builds value relatively consistently over the long term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.