Page 11 - DIY Investor Magazine | Issue 37

‘THE TRUST’S ABILITY TO OFFER SECURE AND ATTRACTIVE INCOME PROTECTION’ That contrasts with ‘demand-based’ infrastructure, where the investor’s income depends on usage; e.g., the amount of revenue a toll-road produces will depend on how many people drive on the road. This made BBGI a compelling investment during the pandemic as it generated the same level of revenue, even as usage of many of its assets fell dramatically; investors in demand-based assets were hit seriously hard. BBGI has also implemented an active treasury management process to ensure maximizing of interest income. A TIGHTENING PREMIUM Despite these positives, BBGI has seen its premium narrow significantly over the past 12 months. The average premium for that period was 11.9%. Today it is 2.9%, which is among the lowest levels the shares have traded at, relative to NAV, since launch in 2011. The trust pays dividends semi-annually and has set a target dividend of 7.63p per share for 2023, implying a forward yield, at the current share price, of 5.2%. The narrowing of the premium suggests concerns about increases in the discount rate, which would lead to a fall in NAV. These are understandable but Frank and Duncan noted last year that they saw read across from other transactions in the market which helped to support the trust’s last discount rate, which will be updated at BBGI’s annual results on 30/03/2023. BBGI’s updated NAV to 31/12/2022 is also due then, and the 11 Apr 2023 DIY Investor Magazine · In theory, the owner of the toll-road could raise prices to match ‘LONG-TERM, RELATIVELY LOW RISK YIELD, WITH THE ADDED inflation, but in practice they would likely be subject to the BENEFIT OF IT BEING HEAVILY SHIELDED FROM THE RISK price elasticity of demand - the more they hike prices, the less THAT INFLATION POSES’ likely it is people will use it. Similarly, in the near-term, demand- based asset holders may see a drop off in demand as they try to raise prices in line with inflation; BBGI isn’t affected by this phenomenon and the creditworthiness of its counterparties also means the likelihood of them failing to pay is very low. INTEREST ON CASH HOLDINGS An additional factor in the trust’s ability to navigate the inflationary environment are its cash holdings; it’s 56 portfolio companies, which manage individual infrastructure projects, tend to have substantial cash holdings on their balance sheets to meet working capital requirements and in reserve accounts. Consequently, the trust benefits from the interest rate hikes that central banks have used to counter inflation, with these larger cash holdings now generating meaningful returns. Compounding this is the manner in which Frank and Duncan structure their investments; deals are made with long-term financing, meaning they aren’t subject to refinancing risk and higher interest earnt isn’t cancelled out by higher interest on borrowings. negative effect from a potential rise in discount rate may be offset by the inflation outperformance seen in the second half of 2022 and any increased assumptions for 2023, as well as substantial interest earned from money held on deposit at the portfolio companies due to higher deposit rates. If so, it’s plausible infrastructure investors are looking to lock-in a long- term attractive yield, given the possibility that interest rates may come down again. BBGI arguably offers the same opportunity today. The trust’s current share price offers a long-term, relatively low risk yield, with the added benefit of it being heavily shielded from the risk that inflation poses. See the full research on BBGI here > Disclosure – Non-Independent Marketing Communication This is a non-independent marketing communication commissioned by BBGI Global Infrastructure. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.