A version of this article was published in the Telegraph’s Questor column today.

The big share price falls in infrastructure funds have persuaded Questor to add to our recommendations in a sector once prized for reliable dividends.

Shares in BBGI Global Infrastructure (BBGI ), a Luxembourg investment company listed in London, offer an attractive, government-backed 6% yield and the potential for capital growth as they languish 12% below the value of the fund’s assets.

Like Questor’s previous tips of International Public Partnerships (INPP ) and HICL Infrastructure (HICL ), BBGI shares tumbled in response to rapidly rising interest rates that made cash and government bonds look better for investors seeking income.

Launched in 2011, BBGI is a £1bn fund running toll bridges, roads and facilities at schools, hospitals and prisons in G7 countries on which it earns inflation-linked revenues on long-term contracts.

From a 100p price at float, the shares peaked at 178.8p in July 2022 but have fallen to 130p. That’s nearly 12% below the portfolio’s underlying net asset value (NAV) of 147.8p per share at 31 December.

With the Bank of England poised to start cutting base rate from 5.25% this summer, the tide could be about to turn for BBGI and the other core infrastructure funds.

Questor believes BBGI makes a compelling addition as the least risky fund in its sector. Unlike HICL and INPP, which over the years have added some economically exposed assets, such as train lines, or regulated utilities such as water companies, BBGI has stuck to its knitting.

The payments BBGI receives on its 56 social infrastructure projects in the UK, North America, Australia and Europe, are entirely availability based. This means it only has to ensure the facilities are operating to be paid and does not have to worry whether people are using them or if a regulator will change how much money it can make.

The advantage of this focused approach is an impressive consistency in income generation on top of solid growth. While the fund suffered its first annual fall in net asset value last year – a small decline of 1.4% due to the impact of higher interest rates – its semi-annual dividends have grown in each of the last 13 years, with the annual payouts covered by income since 2013.

Shareholders who bought in BBGI’s initial public offer 13 years ago have received total dividends of 75.7p per share, with last year’s distribution raised 6% to 7.93p in line with its target and covered 1.4 times by earnings.

In annual results last week, the company also lifted this year’s dividend target by 6% to 8.40p with a further 2% rise to 8.57p pencilled in for 2025.

The combination of capital growth and income means BBGI has generated a total return of 170.8% on its assets since launch, equivalent to 8.6% a year. However, the share price upset of the past two years means shareholders have received only 141.1% on their stakes, or 7.6% a year.

Hopefully, the shareholder return should improve as investors reappraise the value of BBGI’s income stream as interest rates fall, and the discount, or gap to NAV, narrows or even closes.

Such is the reliability of its revenues, the company forecast that without further acquisitions the current portfolio could increase dividends for the next 15 years before starting to wind down and repay capital to shareholders.

It is not BBGI’s plan to stand still, however. Cash from the portfolio means the company can fund new investments without having to raise money from shareholders. Last year BBGI repaid the £64.4m it borrowed to buy its last two new assets in 2022, a project to upgrade the John Hart Generating Station in Vancouver and the A7 Motorway in Germany.

That gives the company room to make further acquisitions. Chief executive Duncan Ball said he was seeing ‘lots of opportunities’ to invest but would balance these against buying back some of the company’s shares. Buybacks can be a good way of lifting returns for shareholders when they are purchased on cheap discounts.  

While BBGI yields slightly less than HICL and INPP, its income looks attractive compared to government bonds on 4.5%. BBGI’s discount is also narrower than its two rivals but still offers a strong share price recovery if interest rates fall and enhance the appeal of its payouts.

There is a danger of interest rates remaining higher for longer if inflation proves stubborn. That need not be bad news for BBGI, which would earn more interest on its cash and sees its annual return rise by 0.5% for every 1% rise in inflation above forecast.

This is a high quality, inflation-linked income fund that invests shareholder capital wisely. Questor says buy.

Key facts

Market value: £930m
Year of listing: 2011
Discount: 12%
Ave discount over past year: 9%
Yield: 6%
Most recent year’s dividend: 7.93p (Dec 2023)
Gearing: Nil
Annual charge: 0.93%