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Three infrastructure investment trusts that Numis has on its radar

09 March 2018

FE Trustnet finds out why Numis Securities is tipping HICL Infrastructure, International Public Partnerships and 3i Infrastructure.

By Gary Jackson,

Editor, FE Trustnet

Infrastructure investments have suffered in recent months on the back of mounting political risks but the analysts at Numis Securities believe that some compelling opportunities can still be found in the space.

High valuations among income-paying assets and the need to diversify portfolios meant that infrastructure had enjoyed a strong run but sentiment was hit after Jeremy Corbyn’s Labour Party made proposals to “bring existing PFI [private finance initiative] contracts back in-house”, as well as nationalising rail, water, energy and Royal Mail.

In its 2018 recommendations, Numis Securities said: “The sector has suffered a sharp derating in recent months, triggered by concerns that the Labour Party would bring existing PFI contracts back in-house, followed by the collapse of Carillion which has focused attention on operational risks. We believe that this has created some value opportunities.

“Sentiment may remain volatile in the near term, but the sector still offers attractive yields with exposure to high quality inflation-linked cashflows. In addition, the assets appear to be conservatively valued relative to transactions in the private market. In our view, the ability to sell assets at a premium to carrying value should limit the potential for persistent discounts across the sector.”

The broker highlighted three infrastructure investment trusts that it thinks investors could consider. In the article below, we take a closer look at the Numis picks.

 

HICL Infrastructure

Numis’ analysts said that HICL Infrastructure presents investors with a ‘trading’ opportunity as its discount to the rest of its peers has created an attractive entry point. The £2.6bn investment trust is trading at a 3.3 per cent discount to net asset value (NAV) while its average peer is trading on a 1.4 per cent premium.

Performance of trust vs sector over 10yrs

 

Source: FE Analytics

“Fundamentally, we still believe the sector offers investors exposure to high quality inflation-linked cashflows, which are difficult to replicate. Moreover, we believe the asset base of most businesses is conservatively valued, relative to pricing being achieved across the private infrastructure market,” they added.

“In our view, this should limit the potential for persistent discounts across the sector. Where they appear periodically, investors which have avoided the sector due to high premiums, may well see current share price valuations as an opportunity to own. Indeed, we would be happy to own HICL Infrastructure at the current levels.”


The portfolio is built around projects in sectors such as education, health and transport with UK and international public sector clients. At the moment, there are 116 projects in the portfolio including the Southmead Hospital PFI Redevelopment Project, a Design, Build, Finance and Operate contract for the A249 road and maintaining the track, power, signalling and communications infrastructure for the high-speed rail link between Amsterdam Schiphol Airport and the Belgian border.

HICL Infrastructure has ongoing charges of 1.18 per cent, is not geared and yields 5.4 per cent, according to figures from the Association of Investment Companies.

 

International Public Partnerships

The next recommendation is the £2.4bn International Public Partnerships investment trust, which Numis has a ‘core’ recommendation because its high inflation linkage compared with its peers. The trust said it has a “significant degree” of inflation linkage to investment returns, claiming a 0.83 per cent projected increase in returns for a 1 per cent increase over anticipated average inflation across the portfolio.

Performance of trust vs sector over 10yrs

 

Source: FE Analytics

Numis’ analysts added: “On a long-term view, we retain our stock preference for companies that have actively positioned themselves to deliver attractive risk-adjusted returns through the economic cycle. We believe that the peer group has become increasingly differentiated by the quality of cash flows as regards potential variability (eg, life cycle risk, inflation linkage, currency hedging) and longevity, all of which could impact performance over the long term. In addition, the competitive market backdrop limits the scope for accretive growth for some funds.

“In this regard, we believe that International Public Partnerships has an advantage over its peers, reflecting its primary origination capabilities. These have facilitated a number of attractive acquisitions which we feel will continue to underpin a robust portfolio performance.”

The trust invests globally in public and social infrastructure assets and related businesses; as noted above it invests in the construction and operational phase of assets, holding them for the life of the concession unless there is a strategic rationale for an earlier realisation. Current assets include a Building Schools for the Future portfolio and the design, construction, financing and maintenance of the German Federal Ministry of Education and Research’s headquarters in Berlin.


International Public Partnerships has ongoing charges of 1.24 per cent, is trading on a 6 per cent premium to NAV and yields 4.6 per cent. It is not geared.

 

3i Infrastructure

The £2bn 3i Infrastructure investment trust is the final recommendation on Numis’ infrastructure list, with its differentiated mid-market mandate making it a potential ‘core’ holding. Focusing on the UK and Europe, the five FE Crown-rated trust has undergone a number of changes in recent years.

Performance of trust vs sector over 10yrs

 

Source: FE Analytics

“The manager has completely rotated its portfolio in the past three years from [over] 80 per cent in core/regulated assets. It now comprises [more than] 75 per cent in mid-market, growth companies. These operate in the transport/logistics, energy, and communications sectors where returns are expected to be more sensitive to the economic cycle. The remaining 23 per cent comprises predominantly primary (construction) PPP projects and a legacy 2 per cent holding in India. This portfolio mix differentiates 3i Infrastructure from the listed PPP/core infrastructure peer group,” the analysts said.

“While we believe that 3i Infrastructure has a strong management team, and a portfolio of interesting businesses with attractive growth prospects, the return profile may be more difficult to predict in the event of a recession. Consequently, we believe the shares are less well suited for income-seeking investors.”

As the chart above suggests, the trust has a strong long-term track record and has outperformed its average IT Infrastructure peer by a wide margin over the past decade. Indeed, FE Analytics shows it is the sector’s top performer over one, three, five and 10 years.

3i Infrastructure has ongoing charges of 1.51 per cent (which includes a performance fee), is trading on a 2.1 per cent discount to NAV, is not geared and is yielding 4 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.