BBGI Global Infrastructure: Quality Portfolio Available At A Discount

The uncertainty around the future path of interest rates has resulted in the majority of investment trusts that are sensitive to this area trading at a discount to their net asset value. In some cases this is entirely warranted, but that is not the situation with the one billion pound BBGI Global Infrastructure (LON: BBGI).

BBGI owns a globally diversified portfolio of 56 low-risk infrastructure projects, with each generating contractual income streams from government or government-backed counterparties in AAA or AA jurisdictions. They include schools, hospitals, toll roads and bridges, all of which are 100% availability based and not exposed to changes in demand.

These high quality assets are currently available at a discount to NAV of around seven percent. This is narrower than BBGI’s closest peers, INPP (LON: INPP) and HICL (LON: HICL) at 18% and 22% respectively, but it remains significantly de-rated in comparison to its 16.5% average premium over the last five years.

Strong Track Record

Since the IPO in 2011, BBGI has generated an annualised total shareholder return of 7.4%, which is within its seven to eight percent yearly target. Over the same period the dividend growth has outpaced inflation as measured by the CPI, with an average annual increase of 3.4%.

The strong performance has been supported by a ‘mechanical’ inflation linkage arrangement in its portfolio, where revenues are automatically indexed by an appropriate measure of inflation each year. According to its latest accounts, its inflation sensitivity is 0.6, which means that if inflation was one percent higher than modelled for all future time periods, the expected portfolio return would increase by 0.6%.

Calculations by the broker Winterflood suggest that BBGI’s valuation is much less sensitive to changes in inflation and discount rate assumptions than INPP and HICL. This implies that it offers a safer type of exposure, as does the moderate gearing of just 2.4%.

Latest Update

In its interim accounts for the six months to the end of June, BBGI made an NAV total return of 1.1% based on a slightly higher discount rate of 7.2%. Strong dividend cover of 1.68x has allowed it to reaffirm its dividend targets of 7.93p for 2023, 8.40p for 2024 and 8.57p for 2025. This gives it a fully covered prospective yield for the current financial year of 5.8%.

Over the last five years the fund has outperformed both HICL and INPP, as well as the wider infrastructure peer group, on both a NAV total return and share price total return basis, with gains of 47.6% and 19.5% respectively. Its high quality portfolio with government backed revenue streams and non-demand based assets makes it a less volatile option given the uncertain economic outlook.

As with all interest rate sensitive trusts, BBGI has seen its share price fall in the last year or so and its premium rating disappear. A fully covered dividend yield of 5.8% may not seem that exciting compared to what you can get on deposit at the moment, but when interest rate and inflation expectations peak and start to drop it could bounce back quickly.