TIDMBBGI
BBGI Global Infrastructure S.A.
06 September 2023
BBGI Global Infrastructure (BBGI)
06/09/2023
Results analysis from Kepler Trust Intelligence
NAV total returns for BBGI fell modestly by 1.4% in the first
half of 2023. This was mainly due to foreign exchange movements and
a change in the discount rate, itself largely caused by interest
rate hikes in the UK impacting UK assets, which are 33% of BBGI's
portfolio. Despite this small decline, the trust has delivered a
strong track record of 8.8% annualised NAV total returns since IPO
in 2011. At the end of the period, the shares traded on a 6.6%
discount to NAV.
The negative valuation effects on the trust's NAV were partly
mitigated by increased deposit and inflation rates. BBGI's
proportional share of cash holdings in portfolio companies stood at
approximately GBP385m as at 30/06/2023. Interest paid on these
holdings has risen substantially over the past two years and
averaged approximately 4.5% during the period. Changes in short and
long-term deposit rate assumptions resulted in an increase to NAV
of approximately 1.2%.
BBGI's discount rate increased by 0.3% to 7.2% during the
period. The weighted average risk-free rate of the BBGI portfolio
stayed flat during the period at 3.8%. As such, the trust's
discount rate includes a 3.4% risk premium, arguably a conservative
figure given the resilient availability-style assets the trust
invests in and their high-quality inflation linkage.
BBGI Chair Sarah Whitney said: "As an internally-managed
investment company, our leadership team's alignment of interest
with our shareholders is clear. In this period of economic
volatility, we will continue to be disciplined in our approach to
capital allocation and will only consider transactions that are
accretive to our shareholders. BBGI has not been immune to the
uncertain market and economic backdrop that has impacted investor
sentiment on almost all UK listed investment companies."
Kepler View
BBGI Global Infrastructure (BBGI) provides investors with access
to a portfolio comprised solely of availability-style assets,
backed by AAA/AA government and government-backed counterparties.
These are public infrastructure assets that generate revenue as
long as they are available for use, meaning they are not subject to
the price elasticity of demand or the regulatory risks that demand
and regulatory-based assets can be susceptible to. The contracts
underpinning these investments have strong inflation linkage, which
acts in a mechanical way, as cash flows increase in line with a
relevant price index.
Despite seeing a small fall in its NAV, performance in the first
half of this year in many ways demonstrated how resilient BBGI's
portfolio can be. The large majority of the small NAV decline was
attributable to changes in FX rates that were not fully covered by
the trust's hedging strategy, and a 50bps increase in UK interest
rates. With the UK currently representing about a third of the BBGI
portfolio, this fed into a higher discount rate for the portfolio
as a whole, which rose from 6.9% to 7.2% in the first half of the
year. As much as investors may like them to, it is hard to see what
BBGI could have done to offset these macroeconomic performance
drivers.
With a weighted average risk-free rate of 3.8% across the BBGI
portfolio, the trust's current discount rate means there is an
implied risk premium of 3.4%. With the trust trading at an 11.6%
discount to NAV as at 31/08/2023 , we think the trust offers a
compelling mix of downside protection and upside potential. The
trust's high quality inflation linkage and AA/AAA counterparties
offer strong protection against further volatility and unexpected
inflation spikes. At the same time, if we are entering a more
benign environment and have reached the end of the rate hiking
cycle, the trust's high dividend yield may start to look more
attractive again, potentially resulting in a tightening of the
discount.
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