3i Infrastructure beats target but interims spark growth debate

3i Infrastructure (3IN ) has delivered another half-year of increased returns and dividends but broker Panmure Liberum is concerned growth may be slowing.

The £3.1bn investment company, which invests in the equity and debt of infrastructure operators, delivered a 5.1% underlying investment return for the six months to 30 September. That put it ahead of its 8-10% annual total return target and lifted net asset value (NAV) to 375p per share from 362p at 31 March.

The company declared a dividend of 6.325p per share, on track for a full-year dividend of 12.65p, up 6.3% on the previous year.

Chair Richard Laing said the largest assets continued to enjoy ‘strong earnings momentum’, which has seen the shares trade on the narrowest discount – currently 11.5% – in its sector, where the average is 17.5%.

However, Panmure Liberum analyst Shonil Chande warned that while the growth was ahead of target, ‘it is clear that the portfolio is slowing down and in future, it will be harder to come by the returns that investors have been used to in the past’.

He said that practically every portfolio company showed ‘a lower return than in the first half of full-year 2024’, with only the smaller holdings showing any ‘meaningful’ increase.

TCR, Europe’s largest manager of airport ground support equipment in which 16% of the portfolio is invested, saw its first-half return fall to 5.3% from 8.2% a year ago.

Fund managers Scott Moseley and Bernardo Sottomayor said TCR continued to outperform expectations and its ‘rental product remains strong, driven by growth in air traffic and the increasing rate of leasing adoption within TCR’s markets’.

Tampnet, which provides offshore data connectivity and makes up 9% of assets, saw returns drop from 17.1% a year ago to 10.2% in the reporting period.

However, Moseley and Sottomayor said that the group had exceeded earnings targets in both the North Sea and the Gulf of Mexico and secured its first fibre-backed contract in the Mexican deepwater in the period.

‘The company also continues to experience growing demand for its private network solution business and its developing carbon capture and offshore wind connectivity solutions,’ they said.

Since the half-year end, 3i Infrastructure has also agreed to sell its minority stake in French renewable energy developer Valorem for €309m (£258m), a 15% increase in the valuation of its 33% stake in March.

The deal is expected to complete in the first quarter of next year, at which point the managers anticipate that the investment will have generated a 21% gross annual internal rate of return and a 3.5 times multiple of the capital invested in 2016.

The sale is the seventh consecutive realisation from the portfolio achieved at a premium, which the managers said demonstrates the ‘continued appetite for 3i Infrastructure’s investments amongst the private markets infrastructure community’.

The proceeds of the Valorem sale will be used to reduce the outstanding balance on the fund’s revolving credit facility.

Future growth will come from the fund’s focus on assets benefiting from ‘long-term growth mega-trends’ while also demonstrating low cyclicality of earnings and a positive correlation to inflation.

Stifel analyst Iain Scouller upgraded 3IN from ‘hold’ to ‘buy’ last week, noting its gearing, or leverage, was due to fall from 18% to 10% after the Valorem sale.

There are also no new public-private partnership projects, which have drawn controversy, and Scouller said the ‘valuation is attractive following the price declining from 350p a few weeks ago’ as a result of pre-Budget selling in anticipation of the hike in capital gains tax.

‘We currently think this is the only traditional infrastructure fund that will see meaningful positive returns in the second half of 2024,’ he said.

‘Our fair valuation is 350p, a 10% discount to our unchanged NAV expectation of 375p to 390p at March 2025.’

The shares added 2p yesterday to 337.5p in response to the news.