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Price pressure pushes 3i Infrastructure further afield

14 November 2017

3i Infrastructure reports strong half-year results and says it is looking outside of its usual areas as investors' search for yield pushes up prices.

3i Infrastructure (3IN) is looking outside of its usual geographies and sectors for better-priced assets as the search for income pushes up the price of procurement.

Half-year results from the £2 billion investment company, which picked up a Citywire Investment Trust Performance Award this month, reported a 7.1% net asset value (NAV) total return in the six months to 30 September, ahead of its target 8%-10% annual target.

Since floating on the stock market ten years ago, 3IN has delivered an average annual total return to shareholders of 11.5% against 8.2% from the FTSE 250. Its shares trade on a premium of 11% above net asset value, which is a higher rating than the 5% average premium of its sub-sector where share prices have been hit by Labour's threat to cancel private-finance initiatives should the party regain power. Unlike its rivals, 3IN's portfolio is more focused on operating companies than PFI contracts.

3IN is more international than its peers with its investments spread 42% in UK and Ireland and and 56% in Europe and Singapore. Managing partner Phil White said the fund was ‘more diversified…than ever before’ but due to the increasing cost of infrastructure projects, he was having to diversify further.

‘The majority of infrastructure investors remain focused on operational assets with proven track records and stable cashflows,’ he said. ‘The demand for low-risk, yielding investments continues to outpace supply and has kept asset prices high and prospective returns low.’

The high demand for infrastructure assets means there is currently record volumes of un-invested capital and a number of companies chasing the same deals.

White said the undersupply was most evident in ‘large core’ infrastructure in major European economies but there has been ‘increased competition in our target sectors in mid-market economic infrastructure’.

White added that there were private-public partnership (PPP) projects in the UK and France at the moment ‘although we do expect renewed momentum in those countries in the next few years’.

‘We remain busy in the Netherlands through our relationship with Heijmans [Capital, a joint project between Heijmans and 3i], and are exploring opportunities in other countries and in other project sectors where the risk profile and returns are attractive,’ he said.

The lack of projects did not stop the trust making a number of investments in the first half of the year. It invested a further £2 million in Oystercatcher to fund an acquisition by one of its subsidiary companies, Oiltanking Ghent.

The fund also agreed to provide a further £12 million to Infinish, which generates electricity from landfill, to fund its growth and exploit spare capacity on its existing sites.

‘Following the strong levels of new investment activity last year, we have seen fewer good opportunities so far this year and have remained disciplined in managing due diligence abort costs,’ said White.

‘The current pipeline is building well, and we expect to progress several opportunities in the second half of the year.’

Finnish electricity distributor Elenia and Anglian Water Group, the fund's two biggest holdings representing 34% of assets, are subject to an ongoing strategic review and may be sold.

‘It is possible that this may lead to divestment by the company of either or both holdings,’ said White.

Kieran Drake, research analyst at Winterflood Securities, said 3IN had produced a strong set of results with an increase in revenue covering its dividends by 1.6 times. Although the sale of Elenia and AWG might lower dividend cover to around 1.3 times it would likely generate a return of cash to shareholders. 

'We believe that the fund is an attractive option for exposure to infrastructure given its 3.9% prospective yield and consistent record of real dividend growth. We think that these factors, combined with the potential for uplifts on any realisation, also serve to justify the fund's current premium rating, which is at the high end of the peer group,' Drake said.

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