22 August 2016 Americas/Canada Equity Research Multi Utilities Brookfield Infrastructure
Partners LP (BIP.N) Rating OUTPERFORM Price (19-Aug-16,US$) 49.10 REINSTATEMENT Target price (US$) 59.00 52-week price range 50.13 - 32.08 Market cap (US$ m) 7,962.15 Reinstating Coverage with an Outperform and Enterprise value (US$ m) 18,188.68 *Stock ratings are relative to the coverage universe in each a US$59 target; Oodles of Organic Growth analyst's or each team's respective sector. ¹Target price is for 12 months. ■ A Brookfield Bonanza: We reinstate Brookfield Infrastructure Partners LP Research Analysts coverage with an Outperform rating and a US$59.00 target price. In our view, Andrew M. Kuske the Street underestimates the underlying organic growth from BIP's existing 416 352 4561 asset base along with increasing network benefits. This baseline growth is [email protected] often overlooked given BIP's abundant M&A opportunities. Importantly, BIP's Paul Tan 416 352 4593 unique funding model allows for ample opportunity to deliver outsized M&A. [email protected] Most notably, we regard the current M&A environment as being extremely favourable and one that may create significant incremental value as some of Brookfield's past transactions. ■ Abundant options: Over nearly the last year (while Restricted), BIP had two highly public deals meaningfully change form or fail to close as previously envisioned (i.e. Asciano and Invepar, respectively). At this stage in time, we believe BIP's market prospects for the existing asset base and the M&A potential look even better. Yet, a critical difference with BIP's evolution is a much more visible organic growth profile coming from existing assets. This maturation lessens the need for M&A and highlights BIP's increasing network benefits that should provide greater financial and valuation clarity. The past combination of acquisitions and a weaker organic capex plan seems to still be within the psyche of many investors. BIP has changed and an abundant acquisition plan may effectively supplement solid organic growth. ■ Investment thesis: BIP's asset base organic growth reduces an M&A need and such activities are additive versus needed to consume excess cash flow. ■ Valuation: Our US$59 target price is obtained, in part, on a NAV along with an implied 4.0% distribution yield (200bps spread on an assumed 2.00% US 10-year bond yield). We reinstate coverage with an Outperform rating. Share price performance Financial and valuation metrics
5 5 Year 12/15A 12/16E 12/17E 12/18E 5 0 EPS (CS adj.) (US$) 1.03 1.70 2.24 2.42 4 5 Prev. EPS (US$) 1.21 1.74 1.84 - 4 0 P/E (x) 47.8 29.0 21.9 20.3 3 5 P/E rel. (%) 257.8 157.1 134.7 140.2 3 0 Revenue (US$ m) 1,855.0 2,292.6 3,003.2 3,195.2 O ct - 1 5 Jan - 1 6 A p r - 1 6 Ju l- 1 6 EBITDA (US$ m) 923.0 1,172.8 1,592.4 1,668.3 OCFPS (US$) 2.81 3.47 4.58 4.77 BIP.N S& P 5 0 0 IN D EX P/OCF (x) 13.5 14.2 10.7 10.3 On 19-Aug-2016 the S&P 500 INDEX closed at 2183.87 EV/EBITDA (current) 19.1 15.0 11.1 10.5 Daily Aug21, 2015 - Aug19, 2016, 08/21/15 = US$39.7 Net debt (US$ m) 8,077 10,227 10,501 10,768 ROIC (%) 3.63 3.71 5.63 5.94 Quarterly EPS Q1 Q2 Q3 Q4 2015A 0.56 0.00 0.46 0.03 Number of shares (m) 162.16 IC (current, US$ m) 15,253.00 2016E 0.25 0.59 0.41 0.44 Net debt (Next Qtr., US$ m) 10,171.0 EV/IC (x) 1.0 2017E 0.61 0.56 0.52 0.55 Net debt/tot eq (Next Qtr.,%) 123.7 Dividend (current, US$) 2.36 Source: Company data, Thomson Reuters, Credit Suisse estimates
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 22 August 2016
Table of contents
Investment Summary ...... 3 Reinstatement of Coverage ...... 8 Abundant Opportunity ...... 8 The Year in Review 8 Fund Flows 9 Nurturing the Network 19 Bountiful Brazil ...... 25 Petrobras Pipelines 25 Teaming up on Transmission 32 Invepar Investment? 34 Valuation ...... 36 Selected Financials 36 Considering the Comps 38 Valuation Parameters 41 Multiple metrics 41 A yield analysis 43 NAV dynamics 46
Brookfield Infrastructure Partners LP (BIP.N) 2 22 August 2016
Investment Summary We reinstate BIP coverage with a US$59.00 target price and an Outperform rating. Some of the key points underlying our reinstatement of coverage include: Rating: Outperform ■ We believe the Street underestimates the underlying organic growth from BIP's existing Target: US$59.00 asset base along with increasing network benefits; ■ On our forecasts, BIP generates double digit FFO growth over the next three years; ■ That projected FFO growth translates into an average of 10% distribution growth; ■ We do not forecast acquisitions and believe BIP's baseline growth is often overlooked given abundant M&A opportunities; ■ As with all Brookfield Group members, BIP possesses advantages from an extremely flexible funding model that can help deliver outsized M&A; ■ That M&A potential should be considered in relation to NAV or distribution growth that can translate into roughly US$6.48/unit of value creation for US$2bn of EV deployment (US$1bn of equity) on our assumptions; Yield and NAV ■ Our US$59 target price is partly supported by a 4% targeted distribution yield; underpinnings to the target price ■ For many reasons, we believe a NAV approach provides some useful valuation context for the BIP; however, the utility of this method is declining with the firm's growth; ■ Our NAV exceeds US$58, however, we include US$7.30/unit for the potential Brazilian pipeline network (yet do not include this figure in our financials); and, ■ This apparent valuation delta between two methodologies highlights the combination of yield attraction and challenges with a precise NAV approach. Fundamentally, we believe BIP's business model has matured with a more visible pipeline of organic growth from the existing asset base. That growth translates into less reliance on M&A, however, the Brookfield private funds business may clearly assist in providing value beyond the current market expectations. We reinstate coverage with an Outperform rating and a US$59.00 target price. Organic growth is more To help put this target price into perspective, Figure 1 and Figure 2 show a distribution visible versus the past matrix and a NAV under various assumptions.
Figure 1: Illustrative unit price at different distribution and yield Distribution 2.10 2.20 2.30 2.40 2.50 2.60 2.70 2.80 2.90 3.0% 70.00 73.33 76.67 80.00 83.33 86.67 90.00 93.33 96.67 3.5% 60.00 62.86 65.71 68.57 71.43 74.29 77.14 80.00 82.86 4.0% 52.50 55.00 57.50 60.00 62.50 65.00 67.50 70.00 72.50 4.5% 46.67 48.89 51.11 53.33 55.56 57.78 60.00 62.22 64.44 d l 5.0% 42.00 44.00 46.00 48.00 50.00 52.00 54.00 56.00 58.00 e i
Y 5.5% 38.18 40.00 41.82 43.64 45.45 47.27 49.09 50.91 52.73 6.0% 35.00 36.67 38.33 40.00 41.67 43.33 45.00 46.67 48.33 6.5% 32.31 33.85 35.38 36.92 38.46 40.00 41.54 43.08 44.62 7.0% 30.00 31.43 32.86 34.29 35.71 37.14 38.57 40.00 41.43 7.5% 28.00 29.33 30.67 32.00 33.33 34.67 36.00 37.33 38.67
Source: Company data, Credit Suisse estimates
Brookfield Infrastructure Partners LP (BIP.N) 3 22 August 2016
Figure 2: BIP NAV in millions, unless otherwise stated EBITDA Multiple Value ($m) Value/Unit Utilities Regulated Terminal 162 12.5x 2,023.9 11.29 Electricity Transmission 145 12.5x 1,807.0 7.85 Regulated Distribution 272 12.5x 3,397.2 14.76 33.90
Transport Railroad 300.6 10.0x 3,005.8 13.06 Ports 190.6 12.0x 2,287.4 9.94 Toll Roads 241.9 8.0x 1,935.5 8.41 31.40 Energy Energy Transmission & Distribution 273.3 12.0x 3,279.2 14.24 District Energy 64.1 12.0x 769.2 3.34 Brazilian Natural Gas Pipelines 140.0 12.0x 1,680.0 7.30 24.88
Communication Infrastructure 79.4 16.0x 1,270.0 5.52
Less Attributable debt & Preferred Units 8,546.0 37.12
Total value of parts 95.70 Less attributable debt 37.12 58.58
Source: Company data, Credit Suisse estimates
Organic growth from Given BIP's relatively unique structure, global footprint and asset mix, our long held view is existing platforms and a Net Asset Valuation approach should help provide a meaningful context for stock market other factors may valuation. As BIP's business continues to grow in each of the verticals on an organic and lessen NAV's utility very predictable basis, the NAV's utility is somewhat decreasing, in our view. In light of BAM's fund raising and BIP's well known progress on certain M&A initiatives, we further delineate the potential option value associated with large scale capital deployments and the impact on the NAV. Our detailed assumptions appear under the Valuation section; however, the capital structure considerations (50/50 debt/equity), 65% distribution payout and 4% yield are the most important for the table below. M&A may create Figure 3: Illustrative unit price accretion meaningful value Capital Deployed (US$m) 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 2% 0.35 0.68 0.99 1.30 1.59 1.87 2.14 2.40 2.65 4% 0.69 1.35 1.99 2.59 3.18 3.74 4.28 4.80 5.30
) 6% 1.04 2.03 2.98 3.89 4.77 5.61 6.42 7.20 7.94 % (
8% 1.38 2.70 3.97 5.19 6.35 7.48 8.56 9.59 10.59 d l 10% 1.73 3.38 4.96 6.48 7.94 9.35 10.69 11.99 13.24 e i
Y 12% 2.07 4.06 5.96 7.78 9.53 11.21 12.83 14.39 15.89
O 14% 2.42 4.73 6.95 9.08 11.12 13.08 14.97 16.79 18.54 F
F 16% 2.76 5.41 7.94 10.37 12.71 14.95 17.11 19.19 21.19 18% 3.11 6.08 8.94 11.67 14.30 16.82 19.25 21.59 23.83 20% 3.45 6.76 9.93 12.97 15.89 18.69 21.39 23.98 26.48
Source: Company data, Credit Suisse estimates
We do not provide In any event, we do not provide credit for hypothetical transactions; however, the potential credit for deals financial impact is important to understand and appreciate. As more details become available and prospective deals possibly move ahead, then we will integrate our baseline assumptions and related work into our BIP financial forecasts. In any event, we believe
Brookfield Infrastructure Partners LP (BIP.N) 4 22 August 2016
BIP's advanced deals may help meaningfully re-rate the stock. Despite this potential, we believe the focus on BIP's valuation should not be on the M&A pipeline, but rather the organic growth from the existing assets. BAM's fund raising Given the success of Brookfield Asset Management's fund raising efforts, BIP looks very provides many options well positioned to re-rating from the time M&A occurs. Specifically, the recent final close of Brookfield Infrastructure Fund III (BIF III) with US$14bn of equity commitments (of which US$3bn is allocated) provides a lot of dry powder and considerable focus from a BAM perspective as per Figure 4.
Figure 4: BAM core and total liquidity US$ in millions, unless otherwise stated Private Renewable Infrastructu Equity and Corporate Property Power re Other Total 2016 Cash and financial assets, net 1,070 11 107 502 250 1,940 Undrawn committed credit facilities 1,847 681 905 704 - 4,137 Core liquidity 2,917 692 1,012 1,206 250 6,077 Uncalled private fund commitments - 6,176 2,997 6,932 2,120 18,225 Total liquidity 2,917 6,868 4,009 8,138 2,370 24,302
Source: Company data
In addition to the BAM support, Figure 5 illustrates BIP's own capital market flexibility with the self-stated liquidity position as disclosed in the Supplemental Financials. BIP possesses multiple Figure 5: BIP liquidity avenues of liquidity US$ in millions, unless otherwise stated Liquidity Q2 2016 Pro-forma Corporate cash and financial assets 502 502 Committed corporate credit facility 1,975 1,975 Subordinated coporate credit facility 500 500 Draws under corporate credit facility (1,194) (244) Commitments under corporate credit facility (77) (77) Proportionate cash retained in businesses 349 349 Proportionate availability under subsidiary credit facilities 409 409 2,464 3,414
Source: Company data, Credit Suisse estimates
Beyond these sources, we believe BIP has other avenues including: the preference share market; selected asset monetizations; common equity issuance and, among other things, BIP corporate level debt. Macro support for Beyond the BIP specifics, we continue to believe there is ample evidence of a significant infrastructure interest and need for infrastructure assets. An area gaining greater interest is that of "infrastructure QE" (quantitative easing). Most notably, several developed market governments around the world made statements about potentially increasing government spending directed towards infrastructure assets. Generally, these governments viewed two factors as being supportive of increased infrastructure spending: ■ Increased infrastructure spending supports general economic activity; and, ■ The current interest rate environment provides historically attractive financing levels. There are ample sources of information regarding the impact of infrastructure investing in terms of economic returns. In the current market environment of negative rates in multiple areas, there is clear potential to issue infrastructure bonds which could then be followed by various Central Banks buying those bonds to expand money supply. Naturally, we are not economists or global strategists, but these themes look to be gaining greater traction in the
Brookfield Infrastructure Partners LP (BIP.N) 5 22 August 2016
regular dialogue. From our vantage point, these issues are clearly supporting prospective infrastructure funds flows. In addition to these factors, Figure 6 illustrates a perspective of short and long rates since 2000 for Canadian yields. A very benign rate Figure 6: Yields Canada – Short and Long Rates Since 2000 environment in many capital markets % 7.0
6.0
5.0
4.0
3.0
2.0
1.0
0 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16
3-month LIBOR CAD 10-year CAD Government Bond 30-year CAD Government Bond
Source: Bloomberg, Credit Suisse / IDC
For some additional perspective, Figure 7 illustrates G7 10-year bond yields. A negative yield reality Figure 7: G7 Group 10-Yr yields (%) in many regions 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 4 4 4 4 4 5 5 5 5 5 6 6 6 6 4 5 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 / / / / / / / / / / / / / / / / 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 / / / / / / / / / / / / / / / / 1 3 5 7 9 1 3 5 7 9 1 3 5 7 1 1 1 1
US Germany UK Italy Canada Japan France
Source: Bloomberg
Low rates should This yield environment should translate into an ongoing attraction for critical infrastructure translate into greater assets having growth. infrastructure attraction
Brookfield Infrastructure Partners LP (BIP.N) 6 22 August 2016
To provide a bit of comparative perspective on the dividend/distribution growth and trading yields, we summarize some of the consensus data for a selection of the Canadian and infrastructure specific relevant entities in Figure 8. A selection of global Figure 8: Infrastructure comparables (yield and dividend/distribution growth) comparatives Year-over-year growth Dividend Current Yield 2017 2018 2019 Abertis Infraestructuras SA 4.80% 6.8% 4.9% 6.0% Atlantia SPA 3.90% 10.4% 10.4% 10.4% Brookfield Infrastructure Partners LP 4.72% 10.6% 8.3% NA CCR SA 1.57% 31.3% 28.9% 24.4% Cheung Kong Infrastructure 3.21% 4.4% 4.8% NA Eiffage 2.16% 11.9% 14.3% 57.3% Enbridge Inc. 3.93% 10.6% 10.4% 3.6% Enbridge Income Fund 5.79% 7.9% 8.2% 0.3% Emera Inc. 4.33% 8.3% 7.0% 7.8% Ferrovial SA 3.56% 4.4% 3.9% 13.8% Fortis Inc. 3.49% 6.1% 5.6% 6.3% Macquarie Infrastructure 6.19% 9.2% 5.9% 6.0% Pembina Pipeline 4.84% 6.8% 7.7% 4.0% Qube Holdings 2.93% 5.8% 23.6% 0.0% TransCanada Corp. 3.70% 8.1% 8.2% 3.3% Vinci SA 2.81% 7.8% 7.9% 8.1% Average 3.87% 9.4% 10.0% 10.8%
Source: the BLOOMBERG PROFESSIONAL™ service
We reinstate BIP coverage with an Outperform rating and a US$59 target price.
Brookfield Infrastructure Partners LP (BIP.N) 7 22 August 2016
Reinstatement of Coverage After an extended period of restriction, we reinstate coverage of BIP with an Outperform rating and a US$59.00 target price. This research report is divided into three parts: Rating: Outperform ■ Abundant Opportunity; Target: US$59.00 ■ Bountiful Brazil; and, ■ Valuation. Each of these areas is addressed in greater detail below. Abundant Opportunity Given our rather extended period of restriction, our reinstatement addresses several main issues over the last year, including: ■ The Year in Review; ■ Fund Flows; and, ■ Nurturing the Network. These areas are addressed below. The Year in Review Given our research restriction was in place for almost a year, we believe brief commentary regarding the major events is useful. Accordingly, we have outlined a number of the major issues that faced BIP in the bullets below over the last year: Lots of activity in the ■ In June 2015, BIP along with institutional partners signed agreement to acquire all of last 12 months Niska Gas Storage Partners LLC's (NKA) common units for an equity investment of roughly US$175m. BIP's US$70m contribution translated into roughly a 40% ownership stake. NKA's independent natural gas storage business owns roughly 250 bcf of North American natural gas storage; ■ BIP sold an interest in the New England electricity transmission business for gross proceeds of roughly US$65m and net proceeds of approximately US$28m with the deal close on August 21st, 2015; ■ On August 17th, 2015, BIP and institutional partners (the "Brookfield Consortium") entered into a binding agreement with Asciano (an Australian rail and port operator) to acquire all the issued capital in an A$12bn enterprise value deal; ■ BIP's first foray into India occurred with an agreement to invest US$120m, alongside institutional investors, to acquire six toll road assets. The assets include 242km of existing motorways and another 103km of roads under expansion or development; ■ By October 2015, BIP completed a C$500m corporate bond issuance that was used for general corporate purposes, investment opportunities and working capital; ■ With the then ongoing saga around Asciano, BIP invested roughly US$900m in an on- market acquisition which was followed by an amended agreement in November 2015 to acquire the Australian infrastructure player; ■ In December 2015, Brookfield closed the acquisition of an additional interest in the Natural Gas Pipeline Limited (NGPL), a North American gas transmission company, for $106 million, increasing ownership to 50%; ■ January 2016, Brookfield signed agreements to sell the Ontario electricity transmission business for gross proceeds of approximately C$370 million and net proceeds of C$220 million;
Brookfield Infrastructure Partners LP (BIP.N) 8 22 August 2016
■ On February 18th, 2016, the Brookfield led consortium offer for Asciano lapsed when the target's board withdrew the prior recommendation triggering an A$88m payment to the Brookfield Consortium and conversations regarding a new deal; An Asciano Annual ■ On March 14th, 2016, BIP in a new transaction with additional consortium members to buy all the shares of Asciano with the direct Brookfield Consortium took a 50% interest in the Patrick business and 100% of BAPS (ports and various supply chain services); ■ On July 20th, 2016, in relation to the Asciano transaction, BIP announced the receipt of a decision from the Australian Competition and Consumer Commission (ACCC); ■ On August 2nd, 2016, BIP closed a previously announced preferred unit issuance that was upsized to C$250m of preferred with the proceeds to be allocated "for investment opportunities, working capital and other general corporate purposes"; and, ■ BIP provided a reminder regarding the details surrounding a three-for-two unit split on August 15th with an effective date on September 14th (date of record September 6th). With that update out of the way, we now turn our attention to the major issue of fund flows. Fund Flows In relation to fund flows, we believe three major areas are pertinent: ■ Infrastructure Interest; ■ BAM's fund raising efforts; and, ■ BIP's balance sheet. These areas are addressed in a bit more detail below. Infrastructure Interest Our starting point for considering the infrastructure interest is a view of index performance for a few infrastructure and utility benchmarks globally (Figure 9).
Figure 9: Infrastructure / Utility index performance Name 1 Week 1 Month 3 Months 6 Months 9 Months 12 Months BROOKFIELD INFRASTRUCTURE PA -0.1% 6.7% 15.7% 40.9% 20.2% 24.5% Global Infrastructure Index / ETF DJB GlblInfra$ -0.4% -0.6% 6.4% 15.8% 8.6% 0.9% Macquarie Global Infrastructur -1.0% -2.4% 4.3% 9.6% 9.6% 0.4% MSCI WORLD INFRA PR -1.1% -1.2% 4.0% 8.4% 8.3% 0.6% S&P GLOBAL INFRASTRUCTUR -0.5% 0.5% 5.4% 14.4% 10.1% 1.5% Average -0.7% -0.9% 5.0% 12.1% 9.2% 0.9% Utilities Index / ETF S&P/TSX UTILITIES INDEX -0.5% -0.5% 6.5% 11.9% 15.1% 11.3% S&P 500 UTILITIES INDEX -1.2% -4.0% 5.4% 8.0% 17.6% 10.1% S&P GL 1200 UTILITIES IX -1.3% -3.2% 3.6% 6.3% 9.4% 2.1% MSCI WORLD/UTILITY -1.4% -3.2% 3.1% 6.0% 9.0% 1.5% ISHARES GLOBAL UTILITIES ETF -1.0% -2.6% 2.5% 6.0% 7.6% 1.9% Average -1.1% -2.7% 4.2% 7.6% 11.7% 5.4%
Source: the BLOOMBERG PROFESSIONAL™ service
For more granularity, we highlight a series of stock specific performances in Figure 10 for a variety of infrastructure entities that are reasonably comparable to some of BIP's business lines or viewed as possible capital market competitors.
Brookfield Infrastructure Partners LP (BIP.N) 9 22 August 2016
Figure 10: Infrastructure comparables performance Name 1 Week 1 Month 3 Months 6 Months 9 Months 12 Months ABERTIS INFRAESTRUCTURAS SA -1.0% 0.5% -0.8% 7.6% -1.2% -5.5% ATLANTIA SPA 1.1% 1.5% -7.7% -1.8% -8.7% -9.9% BROOKFIELD INFRASTRUCTURE PA -0.1% 6.7% 15.7% 40.9% 20.2% 24.5% CHEUNG KONG INFRASTRUCTURE -2.3% 0.7% -6.8% -10.6% -0.4% 0.5% CCR SA 0.0% 7.2% 12.6% 44.7% 32.4% 28.3% EIFFAGE -2.2% 7.0% 1.7% 9.9% 22.0% 24.4% FERROVIAL SA -2.7% -3.8% -6.2% -5.8% -22.0% -19.0% MACQUARIE INFRASTRUCTURE COR 0.7% 5.4% 15.3% 33.8% 5.7% 0.9% QUBE HOLDINGS LTD -1.5% 12.3% 11.4% 34.1% 17.1% 17.6% VINCI SA -2.8% 2.8% 3.6% 6.4% 9.7% 16.1% Average -1.1% 4.0% 3.9% 15.9% 7.5% 7.8%
Source: the BLOOMBERG PROFESSIONAL™ service
In light of the prominence of BIP to many Canadian domiciled Brookfield family investors, Figure 11 illustrates a more geographically focused performance table.
Figure 11: Canadian infrastructure comparables performance Name 1 Week 1 Month 3 Months 6 Months 9 Months 12 Months Pipelines ALTAGAS LTD 1.3% 12.0% 16.8% 5.3% 4.7% 1.6% ENBRIDGE INC -0.7% -0.5% 3.2% 22.7% 7.5% -2.1% ENBRIDGE INCOME FUND HOLDING -1.4% 0.4% 7.9% 17.9% 4.7% -6.6% GIBSON ENERGY INC 2.9% 20.5% 10.0% 8.5% 8.0% -3.3% INTER PIPELINE LTD 1.3% 0.7% 5.4% 21.1% 14.3% -2.8% KEYERA CORP 3.4% 6.8% 5.2% 10.7% -0.9% -4.8% PEMBINA PIPELINE CORP 0.1% 1.6% 8.4% 17.6% 24.5% 7.2% TRANSCANADA CORP -1.4% 1.1% 16.8% 21.4% 41.5% 28.4% VERESEN INC 0.3% 13.4% 29.4% 66.2% 13.2% -9.7% Average Pipelines 0.6% 6.2% 11.4% 21.3% 13.1% 0.9% Utilities ALGONQUIN POWER & UTILITIES 2.4% -0.4% 9.2% 14.4% 13.3% 25.2% CANADIAN UTILITIES LTD-A -0.9% -1.5% 7.1% 10.9% 12.8% 7.4% EMERA INC -1.5% -1.8% 5.8% 3.8% 12.1% 7.4% FORTIS INC -0.6% -0.6% 7.7% 12.9% 13.9% 12.3% HYDRO ONE LTD 2.7% 0.9% 8.4% 13.3% 15.5% NA Average Utilities 0.4% -0.7% 7.6% 11.0% 13.5% 13.1% Average Overall 0.6% 3.8% 10.1% 17.6% 13.2% 4.6%
Source: the BLOOMBERG PROFESSIONAL™ service
Beyond these simple stock performances, we continue to believe there is ample evidence of a significant interest and need for infrastructure assets. An area gaining greater interest is that of "infrastructure QE" (quantitative easing). Most notably, several developed market Infrastructure QE on governments around the world made statements about potentially increasing government the horizon? spending directed towards infrastructure assets. Generally, these governments viewed two factors as being supportive of increased infrastructure spending: ■ Increased infrastructure spending supports general economic activity; and, ■ The current interest rate environment provides historically attractive financing levels. There are ample sources of information regarding the impact of infrastructure investing in terms of economic returns. In the current market environment of negative rates in multiple areas, there is clear potential to issue infrastructure bonds which could then be followed by
Brookfield Infrastructure Partners LP (BIP.N) 10 22 August 2016
various Central Banks buying those bonds to expand money supply. Naturally, we are not economists or global strategists, but these themes look to be gaining greater traction in the regular dialogue. From our vantage point, these issues are clearly supporting prospective infrastructure funds flows. A generally supportive On a more local level, we highlight the attraction for infrastructure in the Canadian market environment for with equity capital market issuance trends from the TSX as appears in Figure 12. This infrastructure activity level of capital market issuance excludes share exchange transactions like Fortis-ITC Holdings. Some of the other notable points around this table include: ■ The amount of infrastructure equity is much greater than the proportional index weight; ■ Many of the infrastructure equity deals were of a very large size (TRP was the largest Canadian equity deal in history); and, ■ Most of the infrastructure capital raises were many times over-subscribed with both the retail and institutional investor bases and, therefore, the shares often traded extremely well following the offerings.
Figure 12: Canadian equity capital market issuances for 2016 YTD C$ in millions, unless otherwise stated Equity / Equity Link Equity Volume (C$m) Issues % Volume (C$m) Issues % Energy 17,203 54 48.7% 16,960 50 51.0% Materials 5,549 107 15.7% 5,329 104 16.0% Financials 3,731 53 10.6% 3,585 50 10.8% Utilities 3,193 3 9.0% 2,043 2 6.1% Industrials 2,574 7 7.3% 2,574 7 7.7% Consumer Discretionary 1,003 10 2.8% 774 7 2.3% Health Care 725 22 2.1% 725 22 2.2% Communications 702 5 2.0% 702 5 2.1% Consumer Staples 638 6 1.8% 552 5 1.7% Technology 23 7 0.1% 23 7 0.1% 35,339 274 100% 33,267 259 100%
Infrastructure 12,809 36.2% 11,559 34.7%
Source: the BLOOMBERG PROFESSIONAL™ service
Debt financing costs With the typical balance sheet skew in the infrastructure industry being towards debt, we are very attractive on believe a significant emphasis on issuance costs and spreads should exist. Accordingly, in price, duration and size terms of debt markets, we highlight a number of issues for the year-to-date by a series of for quality issuers the Canadian issuers (Figure 13).
Brookfield Infrastructure Partners LP (BIP.N) 11 22 August 2016
Figure 13: Selected Canadian infrastructure entity debt issuances Announce Date Issuer Name Coupon Maturity Currency Deal Size (USD) 8/9/2016 Brookfield Renewable Partners ULC 3.630 1/15/2027 CAD 380,894,500 8/8/2016 Pembina Pipeline Corp 3.710 8/11/2026 CAD 380,026,000 8/8/2016 Transcanada Trust 5.875 8/15/2076 USD 1,200,000,000 8/4/2016 Enbridge Pipelines Inc 4.130 8/9/2046 CAD 307,597,600 8/4/2016 Enbridge Pipelines Inc 3.000 8/10/2026 CAD 307,597,600 8/2/2016 Enbridge Gas Distribution Inc 2.500 8/5/2026 CAD 228,780,600 6/23/2016 Plenary Roads Winnipeg Transitway LP 4.148 5/31/2049 CAD 94,716,860 6/20/2016 Bruce Power LP 2.844 6/23/2021 CAD 468,530,400 6/20/2016 Bruce Power LP 3.969 6/23/2026 CAD 312,353,600 6/9/2016 Toronto Hydro Corp 2.520 8/25/2026 CAD 157,133,800 6/9/2016 Emera Inc 2.900 6/16/2023 CAD 392,834,500 6/9/2016 Emera Inc 6.750 6/15/2076 USD 1,200,000,000 1/26/2016 North West Redwater Partnership / NWR Financing Co Ltd 4.750 6/1/2037 CAD 156,311,000 6/7/2016 North West Redwater Partnership / NWR Financing Co Ltd 4.150 6/1/2033 CAD 390,777,500 6/7/2016 North West Redwater Partnership / NWR Financing Co Ltd 4.350 1/10/2039 CAD 390,777,500 6/1/2016 New Richmond Wind LP 3.963 6/30/2032 CAD 121,736,852 6/1/2016 TransCanada PipeLines Ltd 4.350 6/6/2046 CAD 534,432,500 5/31/2016 Grand Renewable Solar LP 3.926 1/31/2035 CAD 467,784,950 5/31/2016 Grand Renewable Solar LP 3.926 1/31/2035 CAD 467,781,896 5/26/2016 Union Gas Ltd 2.810 6/1/2026 CAD 192,396,500 5/26/2016 Union Gas Ltd 3.800 6/1/2046 CAD 192,396,500 5/25/2016 AltaLink LP 2.747 5/29/2026 CAD 267,563,800 5/25/2016 Grand Renewable Solar LP 3.926 1/31/2035 CAD 468,393,366 5/17/2016 Gaz Metro Inc 1.520 5/25/2020 CAD 77,495,300 5/16/2016 407 International Inc 3.600 5/21/2047 CAD 387,988,000 4/5/2016 FortisBC Energy Inc 2.580 4/8/2026 CAD 113,886,600 4/5/2016 FortisBC Energy Inc 3.670 4/9/2046 CAD 113,886,600 4/4/2016 AltaGas Ltd 4.120 4/7/2026 CAD 268,404,850 2/19/2016 Hydro One Inc 1.840 2/24/2021 CAD 362,502,500 2/19/2016 Hydro One Inc 2.770 2/24/2026 CAD 362,502,500 2/19/2016 Hydro One Inc 3.910 2/23/2046 CAD 253,751,750 2/9/2016 Greater Toronto Airports Authority 1.510 2/16/2021 CAD 216,951,000 2/8/2016 TransEd Partners GP 3.951 9/30/2050 CAD 283,703,755 1/26/2016 North West Redwater Partnership / NWR Financing Co Ltd 4.250 6/1/2029 CAD 391,069,250 1/26/2016 North West Redwater Partnership / NWR Financing Co Ltd 4.750 6/1/2037 CAD 213,310,500 1/25/2016 BBIA LP 3.182 3/31/2032 CAD 47,507,690 1/22/2016 TransCanada PipeLines Ltd 3.125 1/15/2019 USD 400,000,000 1/22/2016 TransCanada PipeLines Ltd 4.875 1/15/2026 USD 850,000,000
Source: the BLOOMBERG PROFESSIONAL™ service
For some background for these market dynamics, we highlight some of the work from our most recent interest rate and valuation related note that is available at the following link. In addition to that rates related note, Figure 14 gives a perspective of short and long rates since 2000 for Canadian yields.
Brookfield Infrastructure Partners LP (BIP.N) 12 22 August 2016
Figure 14: Yields Canada – Short and Long Rates Since 2000 % 7.0
6.0
5.0
4.0
3.0
2.0
1.0
0 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16
3-month LIBOR CAD 10-year CAD Government Bond 30-year CAD Government Bond
Source: Bloomberg, Credit Suisse / IDC
Lower… …and even To provide greater emphasis on this historically low interest rate environment, Figure 15 is lower for longer in play only focused on the last two years for the Canadian 10-year bond yield.
Figure 15: Canadian 10-year 2.80 2.60 2.40 2.20 2.00 1.80 1.60 1.40 1.20 1.00 0.80 4 4 4 4 4 5 5 5 5 5 6 6 6 6 4 5 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 / / / / / / / / / / / / / / / / 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 / / / / / / / / / / / / / / / / 1 3 5 7 9 1 3 5 7 9 1 3 5 7 1 1 1 1
Source: Bloomberg
Brookfield Infrastructure Partners LP (BIP.N) 13 22 August 2016
For some additional perspective, Figure 16 illustrates G7 10-year bond yields. Negative rates are Figure 16: G7 Group 10-Yr yields (%) becoming more common 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 4 4 4 4 4 5 5 5 5 5 6 6 6 6 4 5 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 / / / / / / / / / / / / / / / / 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 / / / / / / / / / / / / / / / / 1 3 5 7 9 1 3 5 7 9 1 3 5 7 1 1 1 1
US Germany UK Italy Canada Japan France
Source: Bloomberg
With this backdrop, we turn our attention to the Brookfield Asset Management's business and the recent success in fund raising third party capital. BAM's fund raising efforts Brookfield Asset Management is BIP's General Partner and a substantial unit holder with a 29% interest in the diluted units of the public infrastructure arm. Rather notably, BAM had significant recent success with a variety of third party client fund raisings. Specifically, we note the following: BAM's US$18bn of dry ■ As disclosed in BAM's Q2 results, there is US$18bn of dry powder to be deployed into powder to be deployed various strategies; ■ Over the last 18 months, BAM raised approximately US$27bn over the "flagship private fund strategies" that include: private equity, real estate and infrastructure; ■ More specifically, on July 12th, 2016, BAM announced the final close for the Brookfield Infrastructure Fund III (BIF III) with a total US$14bn of equity commitments. That level of commitments exceeded the original US$10bn target and was greater than the prior fund size of US$7bn in 2013. Notably, Brookfield committed US$4bn to the BIF III in a fairly standard practice with these investments; The largest BAM raise ■ BIF III is already committed to invest more than US$3bn of assets already (US-based was in infrastructure hydroelectric facilities, Brazilian electricity transmission projects, Isagen, Peruvian toll roads and a US water infrastructure project developer); ■ On June 1st, BAM held the final close for Brookfield Capital Partners IV (BCP IV) with a total level of US$4bn of equity commitments that exceeded the initial US$3.5bn target. Brookfield is committed to US$1bn of the total value and more than US$1bn is already invested in various businesses (integrated facilities management, graphite electrodes by way of Graftech and an Australian offshore oil and gas producer); ■ On April 18th, BAM's Brookfield Strategic Real Estate Partners II (BSREP II) held final close with US$9bn of equity commitments that exceeded the original US$7bn target. Of the total amount, Brookfield will commit US$2.3bn and, to date, BSREP II is already committed to more than US$4bn of investments;
Brookfield Infrastructure Partners LP (BIP.N) 14 22 August 2016
■ In the most recent BAM disclosures, the company highlighted the US$27bn of closes on a series of funds and the closing on "$2 billion of capital in other funds and $5 billion of capital for co-investments and joint venture arrangements." These amounts increased total AUM to roughly US$250bn and fee bearing capital to US$108bn; BAM's funding raising ■ In the BAM letter to shareholders, the company noted roughly 150 new investors came momentum is impressive onto the franchise and they contributed more than US$9bn of capital; whereas, existing investors committed an additional US$11bn of capital; ■ In total BAM's asset management franchise now consists of a diversified client base of 425 global private fund investors with an average commitment per client of roughly US$105m per client and about 40% of clients are invested in multiple funds; and, ■ A very notable part of BAM's fund model is that "89% of fee bearing capital is perpetual or long-term" with an average weighted life to maturity of 8 years plus two one year extension periods. From a BAM perspective, the public-private fund model is relatively unique versus many of the other alternative asset managers. Yet, this model looks to be gaining positive traction and growth as partly evidence with, as of Q2 2016, total fee bearing capital of US$108.3bn that consists of the following breakdown: BAM's large global footprint o Listed partnerships: US$48.8 billion; o Private funds: US$47.3 billion; and, o Public markets: US$12.2 billion. This fee bearing capital falls within a number of BAM's businesses that span much of the globe as illustrated in Figure 17.
Figure 17: Global footprint
Source: Company data
We have a long history covering BAM and witnessed many of their investments. Without going into too much detail, we believe Figure 18 provides a useful perspective of the organization's investment track record across strategies.
Brookfield Infrastructure Partners LP (BIP.N) 15 22 August 2016
Figure 18: Private fund performance
An often enviable track record of returns
Note: As at March 31, 2016. Excludes funds in market. Source: Company data
Probably most notably, the dollar value of BAM's fund raising efforts continues to grow in each of the major strategies as shown in Figure 19 . BAM's individual funds Figure 19: Private fund growth are getting bigger
Source: Company data
Size translates into The growth in fund dollar value is important because it means a greater amount of assets greater opportunities can be targeted in terms of number and gross value. We have tended to see an increase in the dollar value for individual transactions across the Brookfield family. In relation to BIP, BAM's support as a General Partner and major unitholder is critical, in our view. Some of that support is justified by BAM's own relative return economics as per Figure 20 illustrated below.
Brookfield Infrastructure Partners LP (BIP.N) 16 22 August 2016
Figure 20: BAM's returns on invested capital by segment US$ in millions, unless otherwise stated Invested Capital LTM FFO FFO Yield 2016 2015 2016 2015 2016 2015 BAM's relative returns Brookfield Property Partners 14,780 14,888 597 492 4.0% 3.3% favour infrastructure Brookfield Renewable Partners 3,915 3,405 262 297 6.7% 8.7% Brookfield Infrastructure Partners 1,638 1,585 237 201 14.5% 12.7% Brookfield Business Partners 1,667 1,787 225 202 13.5% 11.3% Other investments 6,649 5,626 300 141 4.5% 2.5% Cash and financial assets 1,070 1,018 38 90 3.6% 8.8% Disposition gains 29,719 28,309 2,503 2,073 8.4% 7.3% BPY preferred shares 1,275 1,275 76 76 6.0% 6.0% Norbord 237 239 74 10 31.2% 4.2% Acadian Timber 81 80 7 8 8.6% 10.0% Other listed 434 415 50 23 11.5% 5.5% Residential development 2,578 134 5.2% Energy marketing 1,076 (96) -8.9% Other 968 55 5.7%
Source: Company data
Naturally, there can be some accounting issues associated with IFRS and the invested capital amounts. Yet, the numbers in Figure 20 provide a true FFO yield comparison in relation to BAM's major businesses. From our perspective, in terms of absolute, relative and risk adjusted returns, the infrastructure group stands out versus the other businesses. Impressive capital In fairness, the relative quantum of investing into the infrastructure segment has grown as deployed and growing illustrated, in part, in Figure 21 – especially in the context of BAM's own underlying invested capital in these businesses.
Figure 21: Capital deployed US$ in millions, unless otherwise stated Renewable Private Property Infrastructure Power Equity Total North America 2,197 600 925 2,270 5,992 South America 522 201 2,613 467 3,803 Europe 1,177 325 61 25 1,588 Asia and other 107 1,370 - - 1,477 Total invested 4,003 2,496 3,599 2,762 12,860 Committed 1,454 873 168 582 3,077 Total 5,457 3,369 3,767 3,344 15,937
Source: Company data
Considerable BAM core With BAM's view of liquidity and uncalled commitments appearing in Figure 22, there is a and client liquidity notable ability for BIP to allocate a considerable amount of capital with clients.
Figure 22: BAM core and total liquidity US$ in millions, unless otherwise stated Private Renewable Infrastructu Equity and Corporate Property Power re Other Total 2016 Cash and financial assets, net 1,070 11 107 502 250 1,940 Undrawn committed credit facilities 1,847 681 905 704 - 4,137 Core liquidity 2,917 692 1,012 1,206 250 6,077 Uncalled private fund commitments - 6,176 2,997 6,932 2,120 18,225 Total liquidity 2,917 6,868 4,009 8,138 2,370 24,302
Source: Company data
Uncalled fund commitments are shows in Figure 23.
Brookfield Infrastructure Partners LP (BIP.N) 17 22 August 2016
Figure 23: Uncalled fund commitments US$ in millions, unless otherwise stated 2016 2017 2018 2019 2020+ Jun.2016 Property 85 1,290 89 134 4,578 6,176 Infrastructure and renewable power 770 1,067 - - 8,092 9,929 Private equity 114 - - 1,994 12 2,120 969 2,357 89 2,128 12,682 18,225
Source: Company data
Meaningful uncalled The relationship between BAM and BIP is critical, but the underlying infrastructure LP's capital to commit own capital market access is also extremely important as discussed in the next section. BIP's balance sheet From our perspective, the best starting point for considering BIP's capital market flexibility is the self-stated liquidity position as disclosed in the Supplemental Financials (Figure 24). BIP has multiple Figure 24: BIP liquidity avenues of liquidity US$ in millions, unless otherwise stated Liquidity Q2 2016 Pro-forma Corporate cash and financial assets 502 502 Committed corporate credit facility 1,975 1,975 Subordinated coporate credit facility 500 500 Draws under corporate credit facility (1,194) (244) Commitments under corporate credit facility (77) (77) Proportionate cash retained in businesses 349 349 Proportionate availability under subsidiary credit facilities 409 409 2,464 3,414
Source: Company data, Credit Suisse estimates
Beyond these sources, we believe BIP has other avenues including: the preference share market; selected asset monetizations; common equity issuance and, among other things, BIP corporate level debt. BAM's fund business Yet, BIP's most significant source potential liquidity is the General Partner and Manager's provides flexibility private fund business at Brookfield Asset Management. Figure 25 shows Brookfield's infrastructure fund uncalled capital as at the Q2 2016 results. Naturally, there are selected restrictions in these funds on concentration risk, country and business limits along with other factors. Figure 25 shows a truncated version of slide 17 from the BAM supplemental that was, in part, discussed in the previous section. Yet, this figure just focuses on the infrastructure exposure. The most notable aspects of the "Uncalled Fund Commitments – Expiry Profile" for the Infrastructure and Renewable Power groups is the capital timeline.
Figure 25: Infrastructure and renewable power US$ in millions, unless otherwise stated 2016 2017 2018 2019 2020+ Jun.2016 Infrastructure and renewable power 770 1,067 - - 8,092 9,929
Source: Company data, Credit Suisse estimates
A long-dated expiry As per BAM disclosures, there is already US$1bn of Infrastructure and Renewable Power profile for fund capital fund capital committed, but not closed. Given the pipeline of opportunities for both BIP and Brookfield Renewable Partners, we see very few issues with the expiry profile in the near- term. A few other notable points in relation to some of the "typical" features of the funds in the infrastructure group include: ■ At the 90% level of capital invested, a specific fund is considered to be fully invested;
Brookfield Infrastructure Partners LP (BIP.N) 18 22 August 2016
■ That 10% of capital retention is used for a variety of activities ranging from underlying business capex and, among other things, supporting the existing operations; ■ The infrastructure funds tend to be divided 65%/35% for the Brookfield commitment to BIP and BEP, respectively; ■ The overall Brookfield view is a consolidated through the family as the underlying (BIP and BEP) may invest alongside BAM in certain situations; and, ■ An overall Brookfield investment amount in each fund may vary and the Group's BIF III commitment was 28.5% of the total fund (US$4bn of the US$14bn total size). With some of these mechanics out of the way, we believe BAM's own liquidity should be highlighted as appears in Figure 26. Significant Brookfield Figure 26: BAM group liquidity group liquidity US$ in millions, unless otherwise stated Private Renewable Equity and Corporate Property Power Infrastructure Other Total 2016 Cash and financial assets, net 1,070 11 107 502 250 1,940 Undrawn committed credit facilities 1,847 681 905 704 - 4,137 Core liquidity 2,917 692 1,012 1,206 250 6,077 Uncalled private fund commitments - 6,176 2,997 6,932 2,120 18,225 Total liquidity 2,917 6,868 4,009 8,138 2,370 24,302 Opportunities for direct client investing Source: Company data In light of these variables, we view the Brookfield Group as having a significant amount of liquidity to deploy. Beyond BAM's fund business, we see potential for direct client investing into various BIP opportunities as witnessed in some of past deals. Simply, we believe BIP in conjunction with the broader Brookfield Group has a lot of flexibility in relation to funding a fairly large opportunity set at this time. This type of capital flexibility is truly a Brookfield hallmark and core financial strategy. Potential for more direct Moreover, there is an interesting upside to BIP's capital market growth as BAM's private infrastructure clients funds business continues to grow. At this point, BIP has more than 150 relationships with institutional investors. That level compares to more than 425 relationships in BAM's funds. Such fund growth may translate into greater capital recycling, increased capital market access along with more meaningful co-invests. On a potential downside, Brookfield may be in control of assets, but from a BIP level may only have small interests in a growing multitude of assets across multiple BIF funds.
Nurturing the Network A notable change Over the years of our BIP coverage, one element has noticeably changed from inception to now: a large amount of embedded growth from existing assets versus acquisitions. Before addressing the numbers behind this transition, we consider the evolution of BIP's growth strategy with a specific reference to commentary from their 20-F filings. We start with the initial 20-F filing dated June 30, 2008 at page 31 that under the heading of "Our Growth Strategy", in part, stated: "Our vision is to be a leading owner and operator of high quality infrastructure assets. We seek to grow by deploying our operations- oriented approach to enhance value and by leveraging our relationship with Brookfield to pursue acquisitions. To execute our strategy, we seek to: ■ incorporate our technical insight into the evaluation and execution of acquisitions;
Brookfield Infrastructure Partners LP (BIP.N) 19 22 August 2016
■ maintain a disciplined approach to acquisitions; ■ actively manage our assets to improve operating performance; and ■ employ a hands-on approach to key value drivers such as capital investments, development projects, follow-on acquisitions and financings." BAM and BIP have a Also worth addressing is the self-stated Brookfield relationship perspective that in 2008 critical relationship included a belief that "Brookfield provides us with competitive advantages in comparison with a stand-alone infrastructure company in the following respects" ■ "Ability to leverage Brookfield's transaction structuring expertise" ■ "Ability to pursue acquisitions of businesses that own infrastructure assets together with other assets that have a riskier cash flow profile" ■ "Ability to acquire assets developed by Brookfield through its operating platforms" ■ "Ability to participate alongside Brookfield and in or alongside Brookfield sponsored consortiums and partnership" Significant change Admittedly, BIP has significantly changed from 2008 to now in terms of size, scale and from 2008 to now capital market positioning. Notably, the 2015 20-F filing dated February 29, 2016 outlined individual growth opportunities for each business segment along with an overall acquisition strategy expressed, in part, in the following manner: "Over the past few years, we have established operating segments with scale in many aspects of the utility, transport, energy and communications infrastructure industries. As we look to grow our business, we will primarily target acquisitions that utilize existing operating segments to acquire high quality assets that we can actively manage to achieve a total return of 12 to 15% per annum, and extend our operating platforms into new geographies in which Brookfield has a presence. We intend to utilize existing liquidity and capital recycling program to fund acquisitions and prudently access capital markets." Scale achieved in many In our view, this transition is part of BIP's logical growth and evolution from the time of the of BIP's businesses original dividend spin in 2008. As a starting point for considering the balance of growth within BIP's businesses, Figure 27 illustrates the segmented invested capital and FFO metrics over the last 24 months.
Figure 27: BIP segmented invested capital and FFO US$ in millions, unless otherwise stated Invested Capital LTM FFO FFO Yield 2016 2015 2016 2015 2016 2015 Utilities 1,942 2,002 399 374 20.5% 18.7% Transportation 3,948 3,220 394 403 10.0% 12.5% Energy 1,223 1,009 122 77 10.0% 7.6% Communication 446 438 78 20 17.5% 4.6%
Source: Company data
These returns can partially be put into context with BIP's asset base and a growing global network as shown in Figure 28.
Brookfield Infrastructure Partners LP (BIP.N) 20 22 August 2016
Figure 28: BIP asset footprint
Source: Company data
Analytically, we divided this section of the report into BIP's four business segments: ■ Utilities; ■ Transport; ■ Energy; and, ■ Communications Infrastructure. Each of these areas is address in more detail below. Utilities Under BIP's disclosures, the Utilities segment is divided into three categories: ■ Regulated Terminal Operations; ■ Electricity Transmission Operations; and, ■ Regulated Distribution Operations. A natural part of the evolution of BIP's business is the underlying growth opportunities arising from each platform. Some of this growth is very predictable and other situations are more driven by market dynamics. In relation to the Regulated Terminal Operations, BIP's exposure to the Dalrymple Bay Coal Terminal a major growth story was possible when the metallurgical coal market faced more bullish trends. At this time, we do not believe an appropriate environment and conditions exist to support a large scale expansion. South American In terms of the Electricity Transmission Operations, there are a number of significant electricity transmission opportunities in the South American unit in Chile. Very specifically, "[a]s of December 31, growth continues 2015, the approved capital expenditure backlog of our South American transmission system was approximately $442 million and is comprised of projects that have been awarded to us for which expenditures have not yet been made." What is notable about the exposure in South America is BIP's grandfathered operating license permits involvement in generation, transmission and the retail sectors.
Brookfield Infrastructure Partners LP (BIP.N) 21 22 August 2016
A notable area of growth in recent years has been Brookfield UK in the Regulated Distribution Operations. More specifically, Brookfield UK delivers "[o]pportunities for growth in the UK are driven by new gas and electricity ongoing meter growth connections, as well as through leveraging and cross-selling certain bundled service offerings and by introducing new product lines such as "fibre to home" to existing customers. Prospects for growth are further aided by the continual opening up of the electricity market to independent connections providers, the continuing recovery in the housing market and by participating in the UK smart meter roll out program. In early 2016, we adopted approximately 200,000 smart meters from a UK energy retailer, with a contract to adopt up to a further 500,000 meters by June 2017." Figure 29 illustrates BIP's utility capital backlog.
Figure 29: BIP utility capital backlog US$ in millions, unless otherwise stated Q2 2016 Capital backlog, start of period 645 Additional capital project mandates 180 Less: capital expenditures (96) Foreign exchange and other (28) Capital backlog, end of period 701 Construction work in progress 150 Total capital to be commissioned 851
Source: Company data
The utility backlog includes: ■ R$1.8bn for greenfield electricity transmission projects (BIP share – US$80m); ■ Approximately 80,000 new connections in the backlog at the UK regulated distribution business (~$90M); ■ Capital additions at the UK regulated distribution business (~US$500m); and, ■ Chilean transmission system capital enhancements at ~US$230m. Transport Transport capital Before getting into the specific statements regarding the Transport segment, we replicate focused on Brazilian BIP's own capital backlog for this group in Figure 30. rail and toll roads Figure 30: BIP transportation capital backlog US$ in millions, unless otherwise stated Q2 2016 Capital backlog, start of period 514 Additional capital project mandates 175 Less: capital expenditures (52) Foreign exchange and other 50 Capital backlog, end of period 687 Construction work in progress 212 Total capital to be commissioned 899
Source: Company data
Brookfield Infrastructure Partners LP (BIP.N) 22 22 August 2016
The major contributors to capital to be commissioned over the next 2-3 years are Brazilian toll roads and Brazilian rail with ~US$520m and ~US$200m respectively) An enviable WestNet Several years ago the WestNet Rail operations acquired in the Babcock & Brown Rail playbook Infrastructure deal was behind much of the rail unit growth. That emphasis has shifted to the Brazilian business as noted with the following commentary from the 20-F at page 67: "Our Brazilian rail business expects to invest approximately R$5 billion to upgrade and expand its operations over the next few years, allowing it to capture volume growth by attracting cargo volumes that currently are transported by trucks, a higher cost alternative in Brazil. This business is focused on improving network integrations in the system by capturing the growing demand for integrated transportation services in Brazil. This includes a R$2.2 billion port terminal expansion project located at Latin America's largest port. The project will add three berths to handle over 14 mtpa of grain and sugar exports and fertilizer imports, which will significantly benefit our rail operation by increasing volumes to be transported as a result of the added capacity at our terminals and improving our strategic position as an integrated logistics provider. Other projects include the completion of four inland terminals and the purchase of locomotives and wagons." Slowly adding new toll Continuing the South American focus is the growing toll roads business with exposure in road markets Brazil, Chile and now Peru. Additionally, Brookfield also entered the Indian toll road market. Commentary on these initiatives is less specific than for the rail business and includes: "We believe that long-term growth in the South American and Indian economies will trigger increases in traffic volumes. Coupled with tariff increases from inflation and congestion tariffs, this should drive significant future cash flow growth for our toll road businesses. In addition, Brazil, Chile, and India are seeking to increase their respective paved road network by expanding existing roads and developing new roads. These planned expansions should present opportunities for us to invest additional capital in these attractive markets, given the scale of our existing network." With the Ports business, growth opportunities are largely focused on modernization projects along with some other initiatives to increase efficiencies. Energy Upside coming from The Energy segment is divided into two major groups: (a) Transmission, Distribution and North American natural Storage; and, (b) District Energy. With the pipelines business being one of high capital gas pipelines costs and very low variable costs, small investments can have meaningful returns by adding throughput via improved connectivity or additional compression. BIP partly expressed this view with "incremental projects will be constructed through late 2016 and into 2019 and are expected to start contributing incremental adjusted EBITDA in late 2016. The incremental projects include an expansion of capacity in the Chicago market, expansion to provide additional receipt points to the Gulf Coast market and a new pipeline supporting the export market to Mexico." A similar strategy exists in natural gas storage and BIP sees an "opportunity to act as an industry consolidator at attractive valuations." Consolidation potential In terms of District Energy, there is a balance of organic opportunities at the existing in storage and district facilities from a series of strategies (interruptible loads, increased steam generation, energy additional cooling and greater system connectivity). Beyond those opportunities, BIP believes significant opportunities exist to grow the business by way of acquisitions in North America given a high level of industry fragmentation.
Brookfield Infrastructure Partners LP (BIP.N) 23 22 August 2016
Figure 31: BIP energy capital backlog US$ in millions, unless otherwise stated Q2 2016 Capital backlog, start of period 186 Additional capital project mandates 6 Less: capital expenditures (19) Foreign exchange and other (3) Capital backlog, end of period 170 Construction work in progress 45 Total capital to be commissioned 215
Source: Company data
Pipelines facing The Energy capital backlog consisted of the following major components: (a) US$145m in considerable capital Energy Transmission, Distribution & Storage; and, (b) US$70m in District Energy expansion (US$50m in Australia and US$20m in North America. Communications Infrastructure The newest of the Brookfield infrastructure platforms is Communications Infrastructure that sees growth opportunities arising from three trends: "technological evolution driving further site growth, network densification and further site rollout associated with minimum coverage requirements. We believe that the size and scope of our tower platform will position us to take advantage of these favourable trends through construction and acquisition of additional assets." The total Communications capital backlog is US$45m. Summary Organic versus At this stage of BIP's evolution and maturation, embedded organic growth/greenfield from acquisition given the existing assets with line of sight is consuming virtually all of the free cash flow. Such a network benefits growth evolution highlights BIP's increasing network benefits that should provide greater financial and valuation clarity. The reality of having most of BIP's free cash flow consumed with embedded capex activities is that acquisition activities are no longer the mainstay of a predicable level of growth. The past combination of acquisitions and a weaker organic capex plan seems to still be within the psyche of many investors. BIP has changed and an abundant acquisition plan may effectively supplement solid organic growth.
Brookfield Infrastructure Partners LP (BIP.N) 24 22 August 2016
Bountiful Brazil To provide better context on potential capital flows along with the economic impact for BIP from Brazilian opportunities, we address three areas: ■ Petrobras Pipelines; ■ Teaming up on Transmission; and, ■ Invepar Investment? These areas are addressed below. Petrobras Pipelines Plans with Petrobras As very well documented by the ongoing research work from our Latam research team, Petrobras (PBR) continues an extensive asset disposition process. In a January 11, 2016 note entitled "Would You Help, Mr. Brent?" our Latam Oil & Gas team addressed many of the issues facing PBR including the potential divestitures of selected assets. There is little point in addressing all of the Team's extensive work, however, we believe a few points are worth noting, including the notion of "asset interconnectedness" being a risk to buyers. To be more specific, we note the following: Delicate balance with "In the oil industry assets are normally physically and economically energy industry assets integrated. E&P assets need access to crude oil export terminals, gas processing facilities and support infrastructure; pipelines are connected to refineries and terminals. In our view, many of the assets the company could sell bring an underlying risk to a potential buyer related to Petrobras's other assets (e.g., the economics of pipelines to transport oil products from the coast to the interior are contingent on Petrobras committing not to revamp any refinery in the area). For some assets, a slight move from Petrobras could seriously hurt the economics of any acquisition. This will restrict some possible divestments or require long- term contracts to protect buyers." These issues are challenging for many in the industry and highlight the delicate balance in negotiations around extracting assets from integrated oil companies. An additional factor to consider is one of scale as discussed by our Latam team, in part, with: "If Petrobras focuses on the divestment of low-scale non-core assets, we believe the asset sales will take longer to gain momentum and will raise the market's skepticism toward the feasibility of its Business Plan. We believe this is a tough choice the company will have to make. The combination of assets on the one hand increases the potential for scale gains, market protection, and pricing power, but on the other hand creates bigger capital allocation requirements, limiting the universe of possible buyers to a reduced number of companies with strong purchasing power, strong balance sheets, and a good strategic fit to those assets. Management has recently stated it is considering combining assets as a good way to create valuable businesses to be put up for sale." Brookfield a size buyer In our view, Brookfield (in a broad sense) is clearly one of the potential scale buyers in the with a Brazilian focus market for PBR's assets. From our perspective, a number of factors clearly play into favour for Brookfield's participation in the PBR disposition process, including: (a) a longer-term exposure and interest in Brazil – throughout a variety of economic cycles; (b) a longer- term investment time horizon; (c) extensive experience in various distress situations; and, (d) an ability to creatively structure transactions. With this backdrop, the involvement of Brookfield in the PBR's disposition process was not a surprise when formally announced in a May 12, 2016 press release that stated in part:
Brookfield Infrastructure Partners LP (BIP.N) 25 22 August 2016
"…giving continuity to the notice published on February 26, 2016 regarding the process of sale of Nova Transportadora do Sudeste (NTS), announces that the Company's Executive Board approved carrying out the negotiations with Brookfield on an exclusive basis for 60 days, which may be extended for another 30 days…. …Facts deemed relevant on the subject will be timely announced to the market." A clarification was provided on May 13th that, in part, stated: PBR negotiating with "Petrobras hereby responds to Official Letter 202/2016-CVM/SEP/GEA- Brookfield 1, which requests the following clarifications: Official Letter 202/2016-CVM/SEP/GEA-1 “Dear Officer, …Brookfíeld has offered US$5.2 billion (corresponding to R$18 billion) to acquire a Petrobras gas pipeline division, beating out its rivals, according to Reuters, citing three sources with knowledge of the deal. Brookfield's offer for Nova Transportadora do Sudeste (NTS) exceeded the proposals from the Spanish company Gas Natural Fenosa, the French Engie and the Japanese Mitsui & Co. – all of which were also interested in the asset. The transaction involves the sale of NTS, which operates a gas pipeline network in the Southeast. Petrobras is apparently interested in negotiating a potential improvement in the Canadian group’s offer. [...] Large PBR potential Other Assets. This is not the only Petrobras asset in which Brookfield is interested. The Canadian giant has also expressed an interest in Petrobras' stakes in the petrochemical company Braskem and in BR Distribuidora, Brazil’s leading gas station chain. According to sources consulted by Estado, the discussions with Brookfield on the acquisition of the pipeline have made most progress in recent weeks. In the case of Braskem and BR Distribuidora, the interest continues, but the negotiations have bogged down. Given the above, we would like you to confirm if the content of this news item is in fact true and, if so, why such information was not disclosed through a Material Fact, as well as comment on other information deemed relevant to the issue." Clarification As disclosed yesterday, May 12, 2016, through a Material Fact, Petrobras’ Executive Board approved the continuation of negotiations with Brookfield regarding the sale of Nova Transportadora do Sudeste (NTS) on an exclusive basis for 60 days, which may be extended for another 30 days if necessary. These negotiations are ongoing, but there has been no agreement as yet pointing to the conclusion of the transaction or the amounts involved. Any facts deemed to be material regarding this matter will be disclosed to the market in a timely manner." The only update provided to the market at this stage was in July 12, 2016 release in relation to the extension agreement that stated in part:
Brookfield Infrastructure Partners LP (BIP.N) 26 22 August 2016
"…with respect to negotiations for the sale of its equity interest in Nova Transportadora do Sudeste, disclosed on May 12th, informs that the negotiations with the consortium headed by Brookfield, continue, having been extended the period of exclusivity for completion of negotiations for another 30 days…. …We reiterate that this transaction is still subject to approval of its final terms and conditions by the Executive Board and the Board of Directors of Petrobras, as well as the appropriate regulatory agencies…. …Facts deemed relevant on the subject will be timely announced to the market." PBR's NTS is a large There have been no updates to this point in time, but we believe it to be useful to consider pipeline network some of the assets' attributes as outlined in Figure 32. We note that PBR has not precisely defined the Nova Transportadora do Sudeste (NTS) assets. Therefore, we have provided some details regarding a collection of their systems based on PBR disclosures. A starting point is PBR's own disclosures highlight their natural gas transport pipeline network exceeds 9,000km.
Figure 32: PBR natural gas pipeline system System Pipelines Diameter (inches) Length (km) In-Service Comments Gasan 16 357.0 1996 Connects the Capuava and Presidente Bernardes refineries Gasan II 22 39.0 2011 Between Maura Gas Control Station and the Sao Bernardo do Campo Station Gastau 28 96.0 2010 Caraguatatuba and Taubate
o Gasbol Northern 32/24 1,147.0 1999 Corumba (Mato Grosso do Sul) to Guararema (São Paulo) l u
a Gasbol Southern 24/20/18 /16 1,176.0 2000 Between Paulinia and Canoas P
o Gascar 28 456.8 2008 Connects Paulinia (São Paulo) and Japeri (Rio de Janeiro) ã S Merluzao 16 28.5 1993 Between Praia Grande and Presidente Bernardes Refinery Gaspal 22 324.5 1988 Volta Redonda Station to Guararema and Capuava Refinery Gaspal II 22 54.5 2011 From the Guararema Terminal to the Mauá Gas Station (ECGM), in São Paulo Paulinia-Jacutinga 14 93.0 2010 Connects Paulínia, in São Paulo, to Jacutinga, in Minas Gerais
Gasbel I 16 357.0 1996 Duque de Caxias and Gabriel Passos refineries o r i Gasbel II 18 268.9 2010 Volta Redonda (Rio de Janeiro) and Queluzito (Minas Gerais) e n
a Gasjap 28 45.3 2009 Japeri and Duque de Caxias J
e Gaspal I 20 324.5 1998 Volta Redonda Station to Guararema and Capuava Refinery d
o i Gaspal II 22 54.5 2011 Guararema Terminal to the Mauá Gas Station (ECGM), in São Paulo R Tevol Branch 14 5.5 1986 Connects Volta Redonda Station (Esvol) to Volta Redonda Terminal (Tevol)
Source: Company data
Aside from this information, there is not a lot of specific information in relation to the NTS assets. PBR's 20-F disclosures highlighted on page 61 that: Ongoing investments "[i]n 2015, we invested US$513.9 million in our natural gas infrastructure, for PBR's natural gas and in 2016, we plan to continue to invest in (i) the construction of two system gas offshore export pipelines connecting our presalt natural gas producing fields to the Cabiúnas Terminal and Comperj’s processing plant; (ii) the expansion of the natural gas processing capacity of the Cabiúnas Terminal in order to process up to 459 mmcf/d (13 mmm3 /d) with the expectation of increasing the associated natural gas production from the pre-salt reservoirs in the Santos Basin, and (iii) the development of a natural gas processing plant with a capacity of 742 mmcf/d (21 mmm3 /d), located at the future Comperj’s petrochemical complex, also associated with the pre-salt reservoirs in the Santos Basin. The Cabiúnas Terminal expansion became fully operational in March 2016 and Comperj’s natural gas processing plant is scheduled to begin operations by 2019."
Brookfield Infrastructure Partners LP (BIP.N) 27 22 August 2016
A map of PBR's natural gas infrastructure appears in Figure 33.
Figure 33: PBR's natural gas pipeline networks, LNG terminals and gas processing plants
Source: Company data
Disclosures exist in relation to volume obligations on certain lines (Bolivia-Brazil line), but there is a lack of transparent tolling information. There are clearly a variety of contractual terms with natural gas fired plants and local gas distribution companies, however, there is a lack of detail in relation to the financials. Financial and strategic From our perspective, potential acquisitions from PBR could have both financial and value for the PBR pipes strategic value that includes: ■ Significant exposure to growing gas demand in Brazil; ■ An ability to eventually underpin the assets with lower cost debt; ■ A knowledge interplay between the power and pipeline businesses; and, ■ Future expansion projects on the pipeline network along with other related midstream opportunities in processing and storage. Brookfield's statements regarding the PBR assets are referenced below from recent calls and various disclosure documents. Firstly, from BAM's Letter to Shareholders comments in relation to PBR and specifically on transaction sourcing, included:
Brookfield Infrastructure Partners LP (BIP.N) 28 22 August 2016
BAM approach to "We often acquire assets through “off-market” means. This enables us to investing fits well with find transactions that are not generally available to most others, and the PBR assets allows us to avoid auctions much of the time. This usually means that over the longer term we can be disciplined with our capital and are also able to earn returns in accordance with our goals. Off-market to us means the following: (1) we have significant capital to deploy in the sectors we operate in and as a result, when a seller considers who might buy their large asset, we are usually at the top of the list because as transactions get larger, that list gets shorter; (2) we operate in many markets with a global footprint, and when markets are out of favour we are usually there with a bid; and (3) we have operating capabilities and a reputation that often enable us to bring more to a deal than just capital; this allows us to underwrite with speed and certainty, and find additional value from an asset…. ….As a second example, we have been working to acquire a natural gas pipeline business in southern Brazil from Petrobras. This transaction, if completed, will involve a very large commitment of capital and a sophisticated operating business in a country that is under considerable Brookfield's views on stress. We have exclusivity to complete this transaction and are thrilled to PBR's pipes be involved with this asset. We have this opportunity because we have the capital, deep knowledge of Brazil, and expertise to diligence and operate a natural gas pipeline. As a result, we believe odds favour good long-term returns. Our business is based on utilizing our competitive advantages to source transactions, followed by working the assets we acquire to enhance the returns over those that might otherwise result without our resources. In total, these advantages should enable us to earn greater returns, and as these enhanced returns compound over time, they can meaningfully add value to those we invest on behalf of." Specifically in relation to BIP and the PBR natural gas system, the most recent Letter to Unitholders used the following language: A minimum US$700m "[w]e are in exclusive discussions to acquire a natural gas transmission investment for BIP… company in Southern Brazil from Petrobras. These are long-life natural gas pipelines that are well located and represent the sole infrastructure that brings natural gas to the core economic regions in the highly populated states of São Paulo, Rio de Janeiro and Minas Gerais in south-central Brazil. This business is 100% contracted under long-term ship-or-pay agreements. We expect to invest a minimum of $700 million into a Brookfield-led consortium alongside other institutional partners’ capital." On the BIP conference call, the following comments were made in the opening comments: …with favourable "In addition, we are also advancing several new opportunities where we potential returns will deploy approximately $700 million to immediately grow our Utilities and Transport businesses. These investments should deliver after- tax returns on equity at the higher end of our target return threshold. Over the past year, we have been evaluating a number of exceptional opportunities across various sectors in Brazil. While the country is experiencing political turmoil and a severe economic downturn, it is an economy with significant growth potential, solid underlying fundamentals and a strong democratic regime that is well-positioned for a good recovery in the medium term. Brookfield has been in Brazil for over a hundred years and we have a successful record of investing counter-
Brookfield Infrastructure Partners LP (BIP.N) 29 22 August 2016
cyclically. So while investor sentiment has generally been negative on the country, we are taking a contrarian view and investing in high quality franchises that in normal periods would not be available at a reasonable value." "Our focus in recent months has been on gas and electricity transmission assets as these are low risk utility businesses underpinned with availability-based revenue frameworks and full inflation indexation. In that regard, we are in exclusive discussions to acquire a natural gas Consortium members transmission company in Southern Brazil from Petrobras. These are will be critical long-life natural gas pipelines that are well located and represent the sole infrastructure that brings natural gas to the core economic regions in the highly populated states of Sao Paulo, Rio de Janeiro and Minas Gerais in south-central Brazil. This business is 100% contracted under long-term ship-or-pay agreements. We expect to invest a minimum of $700 million into a Brookfield-led consortium alongside other institutional partners’ capital." In light of the limited financial information available, we have made a number of financial assumptions around NTS based on several assumptions that include: ■ As disclosed by BIP, we anticipate a US$700m capital investment; ■ BIP's self-stated return targets are 12%-15% total returns per annum; A very attractive return ■ From various parts of the Brookfield Group, some targeted returns in Brazil are "going- framework in" 20% nominal cash flow and low-teens on a real basis (local currency); ■ With selected Brazilian assets offering real 9.5% WACC returns, we believe high teen and low 20% returns are possible on selected asset packages; ■ For a variety of reasons (largely revolving around the Brazilian financing environment and Brookfield recent BIF III close), we believe the cash flow invested will be done on an equity basis only; and, ■ Over a period of time (likely 3-5 years), we believe these assets could be underpinned by an issuance of debt to create a more efficient capital structure. With this background and assumptions, we provide a hypothetical return analysis (Figure 34) for the possible economics around NTS.
Figure 34: Hypothetical return analysis US$ in millions, unless otherwise stated Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Real returns 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% Nominal returns 16.5% 16.5% 16.5% 16.5% 16.5% 16.5% 16.5% 16.5% 16.5% 16.5%
Equity capital 700 700 700 700 350 350 350 350 350 350 Debt capital - - - - 350 350 350 350 350 350 Interest rate 10% - - - - 35 35 35 35 35 35
Cash returns 115.5 115.5 115.5 115.5 80.5 80.5 80.5 80.5 80.5 80.5 Effective return 16.5% 16.5% 16.5% 16.5% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0%
Source: Company data, Credit Suisse estimates
There are many unknowns with the economics around the PBR assets and we attempted to make a number of reasonable assumptions through the Brookfield lens. Clearly, there may be issues in completing transactions with PBR. Naturally, there are clear challenges in the disposition process facing certain PBR assets. In a July 22nd press release, Petrobras stated, in part, the Board of Directors:
Brookfield Infrastructure Partners LP (BIP.N) 30 22 August 2016
A Brookfield-PBR deal "…approved an alteration to the model to be used to dispose of a stake is not a given in its subsidiary Petrobras Distribuidora (BR). The competitive bid process under way will be terminated and replaced by a new sale method. As part of the competitive bid process, Petrobras received three proposals that were analyzed and found not to meet the company’s objectives as expressed in the respective request for proposals. Thus, the Executive Board and Board of Directors have decided to start a new competitive bid process aimed at maximizing the value of the fuel distribution business, in line with Petrobras’ strategic objectives and keeping the operation integrated into the oil chain. The new process will look for partners with which Petrobras will share control of the distributor, through a corporate structure that will involve two share classes – common and preferred. Petrobras will retain the majority of the company’s total capital, but will have 49% of the voting shares. Pursuing partnerships? Strategic issues for Petrobras must be properly reflected in the partnership structure as a condition for the transaction to be completed." This partnership language has been used in other situations as partly evident in a recent PBR presentation as appears in Figure 35.
Figure 35: Petrobras divestment plan
Source: Company data
As we have witnessed with many prior situations, larger scale transactions can often pose many difficulties in getting to close. Yet, the potential reward associated with these types of transactions is commensurately outsized and, accordingly, typically worth the effort – especially in the manner of approach by Brookfield.
Brookfield Infrastructure Partners LP (BIP.N) 31 22 August 2016
Teaming up on Transmission Most recently, Brookfield (broadly) has openly discussed their recent return to the Brazilian electricity transmission sector. From BAM's Q2 Letter to Shareholders, the following quote is relevant to this business line: Brookfield re-focusing "[s]eparately, we were recently awarded a portfolio of greenfield on Brazilian electricity transmission lines and are now in discussions with several sellers to transmission acquire operating assets to establish a business with substantial scale in the country. These are long-life, 30-year concession assets that earn cash flows under a stable, availability-based regulatory framework. With approximately 2,800 km of greenfield projects underway in Brazil and 10,000 km of transmission lines in Chile, we are an industry leader in the South American transmission sector." From a BIP perspective, the Q2 Letter to Unitholders outlined the following views: "[over the past year, we have been evaluating a number of exceptional opportunities across various sectors in Brazil. While the country is experiencing political turmoil and a severe economic downturn, it is an economy with significant growth potential, solid underlying fundamentals and a strong democratic regime that is well-positioned for a good recovery in the medium term. Brookfield has been in Brazil for over 100 years and we have a successful record of investing counter-cyclically. So while investor sentiment has generally been negative on the country, we are taking a contrarian view and investing in high quality franchises that in normal periods would not be available at a reasonable value." "Our focus in recent months has been on gas and electricity transmission assets as these are low risk utility businesses underpinned with availability-based revenue frameworks and full inflation indexation. We believe that in the current capital constrained environment in Brazil, these assets can be acquired at very attractive risk-adjusted returns. A brief summary of these transactions is as follows…" "…We are also excited to re-enter the country’s electricity transmission sector for the third time, given our positive experience from 2006 to 2009 and prior to that as one of the early investors in establishing many of the electricity concessions in the country years ago. We were recently awarded a portfolio of greenfield transmission lines and are now in discussions with several sellers to acquire operating assets to establish a business with substantial scale in the country. These are long-life, 30-year concession assets that earn cash flows under a stable, availability- based regulatory framework. With approximately 2,800 km of greenfield projects underway in Brazil and 10,000 km of transmission lines in Chile, we are an industry leader in the South American transmission sector. We expect to deploy approximately $200 million over the next several years to complete our electricity transmission projects." A large scale growth In our view, there are considerable opportunities across the electricity industry in Brazil as opportunity partly evidence in our long-standing coverage of BAM, BEP and BIP. Presently, the asset level detail is lacking in the BIP disclosures, however, the return frameworks within Brazil for these types of assets is attractive, in our view. As a starting point, we provide a map of Brazil's electricity transmission sector (Figure 36).
Brookfield Infrastructure Partners LP (BIP.N) 32 22 August 2016
Figure 36: Brazil's electric transmission map
Source: Angencia Nacional de Energia Electrica (ANEEL)
For a variety of reasons, Brazilian electricity transmission assets are very interesting area for BIP's future capital allocation. Very simply, in April, Aneel (Brazil's electricity regulator: "Agencia Nacional de Energia Eletrica") held an auction for greenfield transmission projects. As discussed in our Latam team's note, there were 24 available projects of which Limited audience for transmission assets in 14 received bids. Most notably, a less than 60% participation rate "marked an past auctions improvement in relation to the last two years, which saw even lower participation rates." Given the challenges in the current auction process and resulting interest levels, Aneel improved the regulatory WACC on the projects to 9.5% real WACC and accepted BNDES financing up to 70% of the value. By way of comparison, the prior return threshold was 8.5% real WACC and 50% project financing from BNDES.
Brookfield Infrastructure Partners LP (BIP.N) 33 22 August 2016
Favours Brookfield's Based on this last auction alone, a considerable market opportunity exists with R$12bn of capital allocation plans total capex being offered, but R$6.9bn attracting interest. Even more notably, two of the four biggest lots (B and D) with a collective capex of ~R$3bn did not receive bids. Clearly, a number of challenges remain in allocating capital to the Brazilian electricity sector as well documented by our Latam team. Yet, we believe players like BIP and BAM's private funds business are very well positioned to capitalize on the current market dislocations.
Invepar Investment? More than a year ago, we spent considerable time analyzing Invepar as large potential investment in Brazilian assets with significant transformational appeal. In the Q4 Letter to Unitholders, BIP stated the confirmation of abandoning the acquisition efforts: Invepar efforts not "Recently, we decided to drop our efforts to acquire a 25% stake in necessarily lost Invepar from OAS, as we could not reach an acceptable agreement with various stakeholders. However, our due diligence effort has not gone to waste. Concurrent with our discussions with OAS, we were offered the opportunity to fund R$500 million (~$125 million) of a total R$2.0 billion shareholder loan directly into Invepar. The loan is indexed to inflation, bears interest at approximately 20% and is repayable with any asset sale proceeds. Invepar will likely proceed with assets sales and we will be in a strong position to compete as we have already completed due diligence on all of the assets." With our longstanding coverage of much of the Brookfield Group, we believe many instances exist of significant due diligence occurring on assets and companies without transactional success. From our perspective, a few famous quotes provide a bit of context: ■ "Timing is Everything" Tommy Shaw ■ "Before anything else, preparation is the key to success" Alexander Graham Bell ■ "Success depends upon previous preparation, and without such preparation there is sure to be failure" Confucius BIP may have a longer- These eclectic quotes may help with the understanding that Invepar is not necessarily a term opportunity from lost effort, but rather one that helps The Brookfield Group on a longer-term basis. Given Invepar the preparation and the loan, we view Brookfield as being extremely well positioned for the Invepar situation that may unfold in the future. We continue to view Invepar as a very exciting situation that may translate into considerable opportunity arising from embedded growth, buying a number of the minority positions. At an even more granular level, some underlying operating assets have minority interests that may provide another roll-up opportunity. Beyond these issues, we expect a significant amount of embedded capex along with the benefit of a network effect to provide ongoing capital deployment avenues. At a high level, the Invepar play could be eventually be transformative like the previous Babcock & Brown Infrastructure/Prime deals. The bullets below provide some context on the Invepar assets: Invepar is reminiscent ■ As stated above, BIP is exposed to an Invepar loan with various protections; of Babcock & Brown ■ Invepar owns stakes in a variety of critical infrastructure assets including: o The GRU Airport in Sao Paulo; o MetroRio which is responsible for managing, operating and maintaining a few lines of Rio de Janeiro's transit system; o LAMSA a toll road in Rio de Janeiro; and, o CART and CLN that each own toll roads concessions in Brazil;
Brookfield Infrastructure Partners LP (BIP.N) 34 22 August 2016
■ In light of the underlying asset ownership structures, we believe a clear move could be made for selected consolidation actions of some underlying assets; and, ■ Beyond the ownership consolidation potential, we view substantial longer-term capital allocation opportunities on the key asset portfolio. Invepar may become On a longer-term basis, the situation with Invepar may be somewhat reminiscent of like Canary Wharf Brookfield's roughly decade long saga with Canary Wharf that ultimately ended with control of that asset. Yet, in light of the current environment, we provide no value to any potential Invepar involvement.
Brookfield Infrastructure Partners LP (BIP.N) 35 22 August 2016
Valuation Rating: Outperform We reinstate coverage of Brookfield Infrastructure Partners with an Outperform rating and Target: US$59.00 an US$59.00 target price. In our view, the Street underestimates the underlying organic growth from BIP's existing asset base along with increasing network benefits. From our vantage point, this baseline growth is often overlooked as a result of BIP's abundant M&A opportunities. With BIP's unique and extremely flexible funding model that is supported by Brookfield Asset Management's private fund capital, balance sheet activities and capital recycling, there are clear opportunities to deliver outsized M&A. Notably, we regard the current M&A environment as being extremely favourable and one that may create significant value as experienced in some of past transactions. As per our typical practice, we take a multi-faceted approach in considering valuation. In this section, we address three distinct areas: 1. Selected Financials; 2. Considering the Comps; and, 3. Valuation parameters. Each of these areas is addressed in greater detail below. Selected Financials In this section, we provide summary financial statements in Figure 37, Figure 38 and Figure 39 along with brief descriptions of some key assumptions. Figure 37 starts with the summary income statement.
Figure 37: Summary income statement US$ in millions, unless otherwise stated 2015 2016e 2017e 2018e Revenues 1,855 2,293 3,003 3,195 Total Expenses (932) (1,139) (1,477) (1,594) Gross Profit 923 1,154 1,526 1,602 Other income - 19 66 67 Interest expense (367) (451) (529) (556) Depreciation and amortization expense (375) (489) (542) (547) Other 206 210 (4) (4) Net income (loss) before income tax 387 444 518 562 Income tax recovery 4 - - - Net income (loss) before non-controlling interest 391 444 518 562 Net income (loss) attributable to non-controlling interests 93 13 - - Net income (loss) 298 431 518 562 Net income (loss) to LP 232 391 518 562
EPU 1.06 1.70 2.24 2.42 FFO 3.58 4.10 4.60 4.79 DPU 2.12 2.34 2.60 2.84
Source: Company data, Credit Suisse estimates
Some key highlights from our income statement forecasts include: Double digit FFO and ■ We forecast significant FFO growth from 2015 actuals to 2016 of 16.7% which is partly DPU growth aided by past acquisitions; ■ Our assumptions translate into DPU growth averaging 10% per annum until 2018; and, ■ The adjusted payout ratio remains relatively constant in the mid-60s which is roughly at the mid-point of BIP's self-stated 60%-70% payout ratio. Figure 38 illustrates our summary cash flow statement.
Brookfield Infrastructure Partners LP (BIP.N) 36 22 August 2016
Figure 38: Summary cash flow statement US$ in millions, unless otherwise stated 2015 2016e 2017e 2018e Operating Activities Earnings 391 444 518 562 Adjustments for non-cash items: 323 355 542 547 Change in non-cash working capital (80) - - - Cash provided by operating activities 634 798 1,059 1,109
Financing activities Distributions to unitholders (546) (578) (601) (660) Change in equity 866 21 47 64 Increase/(repayment) in long term debt 1,045 1,415 468 468 Cash used in financing activities 1,765 1,349 (86) (127)
Investment activities Additions to property, plant and equipment (2,524) (1,996) (780) (780) Cash provided by investing activities (2,349) (1,966) (780) (780)
FX (32) 9 - - (Decrease)/Increase in Cash and Cash Equivalents 18 190 193 201
Source: Company data, Credit Suisse estimates
Key highlights from our cash flow statement include: Meaningful capex from ■ We forecast just shy of US$800m of capital additions in both 2017 and 2018; the existing network ■ We do not forecast any acquisition within our numbers; and, ■ Our assumptions do not contemplate any major changes to the DRIP program. Our summary balance sheet appears in Figure 39.
Figure 39: Summary balance sheet US$ in millions, unless otherwise stated 2015 2016e 2017e 2018e Assets Cash and cash equivalents 153 263 538 189 Accounts receivable 215 372 381 499 Inventories / Other 452 1,581 1,581 1,581 Total Current Assets 1,553 2,730 2,924 3,125
Property, plant and equipment 7,632 8,443 8,682 8,915 Intangible asset 3,296 4,452 4,452 4,452 Other 5,254 5,548 5,548 5,548 Total Assets 17,735 21,174 21,605 22,040
Liabilities and partnership capital Total current liability 1,210 923 923 923 Corporate Borrowings 1,380 2,238 2,238 2,238 Non-recourse borrowings (Property specific) 5,550 7,243 7,711 8,179 Deferred tax liabilities 1,375 1,508 1,508 1,508 Total liability 10,559 12,980 13,448 13,916
Shareholder equity Non-controlling interest 3,126 3,888 3,888 3,888 General partnership capital 23 25 25 25 Limited partnership capital 3,838 3,902 3,865 3,832 Preferred Shares 189 379 379 379 Total partnership capital 7,176 8,194 8,157 8,124 Total Liability and partnership capital 17,735 21,174 21,605 22,040
Source: Company data, Credit Suisse estimates
Not forecasting Key highlights from our balance sheet include: acquisitions or ■ We do not forecast incremental equity issuance for the current capital program; incremental equity Brookfield Infrastructure Partners LP (BIP.N) 37 22 August 2016
■ Capital efficiency initiatives involving re-levering underlying is not contemplated; and, ■ The cash position builds in the "out" years as the capital program declines in 2019. These financials only capture part of BIP's substantial growth from the time of the dividend spin in 2008. Very simply, BIP is unique in many respects that include: structure; history, size, investment style; funding model; parental support; accounting; and, distribution. Each of these issues makes comparisons challenging along with the consideration of valuation. In the next two sections, we address some of these issues.
Considering the Comps In light of the capital market comparison for many of Brookfield Infrastructure Partner LP's investors in the domestic Canadian market, Figure 40 highlights a selection of Canadian pipeline, utility and power comparables.
Figure 40: Canadian comparables Price on P/E Div Yield EV/EBITDA Company Ticker Target Price Rating 19-Aug-16 2016 2017 2018 2016 2017 2018 2016 2017 2018 Pipelines AltaGas ALA.TO C $ 34.71 NR NR 35.4x 31.8x 30.9x 5.9% 6.2% 6.7% 13.6x 12.8x 12.1x Enbridge Inc. ENB.TO C $ 53.52 C $ 58.00 NEUTRAL 23.1x 21.9x 20.3x 3.8% 4.2% 4.9% 12.9x 12.1x 11.5x Enbridge Income Fund Holdings ENF.TO C $ 32.20 C $ 34.00 NEUTRAL 14.9x 14.0x 14.5x 5.7% 6.3% 6.9% NA NA NA Gibson Energy Inc. GEI.TO C $ 17.55 C $ 16.00 NEUTRAL NA NA 50.7x 7.5% 7.6% 7.8% 12.7x 9.7x 9.0x Inter US IPL.TO C $ 27.75 NR NR 21.1x 20.2x 19.9x 5.7% 6.0% 6.7% 14.9x 14.0x 14.0x Keyera Corp. KEY.TO C $ 40.34 C $ 42.00 NEUTRAL 26.3x 23.3x 21.8x 3.8% 4.1% 4.5% 14.4x 12.5x 12.0x Pembina Pipeline Corporation PPL.TO C $ 39.24 C $ 44.00 NEUTRAL 32.5x 24.0x 19.9x 4.8% 5.2% 5.7% 15.4x 12.2x 10.3x TransCanada Corp. TRP.TO C $ 61.21 C $ 70.00 OUTPERFORM 23.9x 22.4x 19.9x 3.7% 4.0% 4.4% 13.1x 11.7x 10.5x Veresen VSN.TO C $ 12.61 NR NR 54.6x 30.2x 22.0x 7.3% 7.3% 6.3% 9.5x 9.0x 9.4x Utilities Brookfield Infrastructure Partners LP BIP US $ 49.10 US $ 59.00 OUTPERFORM 40.2x 31.9x 26.5x 4.6% 5.1% 5.4% 7.0x 5.9x 5.6x Canadian Utilities Limited CU.TO C $ 38.94 C $ 42.00 NEUTRAL 18.6x 17.7x 16.5x 3.3% 3.6% 3.9% 10.2x 9.4x 8.5x Emera Inc. EMA.TO C $ 47.78 C $ 58.00 OUTPERFORM 19.5x 17.4x 15.6x 4.1% 4.4% NA 7.2x 5.4x 5.0x Fortis Inc. FTS.TO C $ 42.95 C $ 46.00 NEUTRAL 19.8x 17.6x 16.4x 3.5% 3.8% NA 9.7x 6.1x 5.9x Hydro One Limited H.TO C $ 25.77 C $ 26.00 NEUTRAL 21.8x 20.6x 19.3x 3.4% 3.5% 3.6% 12.5x 11.8x 11.1x Power Boralex BLX.TO C $ 19.21 NR NR 62.4x 36.9x 33.1x 2.8% 3.0% 3.3% 10.5x 9.8x 9.3x Brookfield Renewable Partners BEP_u.TO C $ 39.74 C $ 44.00 NEUTRAL 45.0x 42.0x 34.4x 4.5% 4.7% 5.0% 7.0x 6.4x 6.1x Capital Power Corporation CPX.TO C $ 21.49 C $ 18.00 UNDERPERFORM 17.7x 21.6x 21.8x 7.0% 7.4% 7.6% 7.6x 7.8x 7.7x Innergex INE.TO C $ 14.62 NR NR 66.5x 37.5x 47.9x 4.4% 4.5% NA 17.6x 12.4x 12.3x North Power NPI.TO C $ 24.70 NR NR 62.4x 26.2x 15.8x 4.4% 4.6% 5.1% 17.7x 13.7x 9.8x TransAlta Corporation TA.TO C $ 5.73 C $ 6.00 UNDERPERFORM NA 33.7x 30.5x 2.8% 2.8% 2.8% 5.9x 5.8x 5.8x TransAlta RNW.TO C $ 14.46 NR NR 19.8x 16.4x 14.8x 6.1% 6.3% 6.5% 10.4x 9.6x 9.3x Avg. 32.9x 25.4x 24.4x 4.7% 5.0% 5.4% 11.5x 9.9x 9.3x
Source: Company data, I/B/E/S, Credit Suisse
Perhaps more relevant to business lines, but not necessarily as comparative investments for many in the shareholder base is Figure 41 with a selection of infrastructure players.
Figure 41: Infrastructure comparables Price on P/E Div Yield EV/EBITDA Company Ticker Target Price Rating 19-Aug-16 2016 2017 2018 2016 2017 2018 2016 2017 2018 Abertis ABE.MC € $ 13.60 NR NR 17.3x 17.0x 14.5x 5.2% 5.5% 5.9% 8.4x 7.9x 7.5x Qube Holdings Limited QUB.AX A $ 2.69 NR NR 32.4x 27.7x 22.8x 1.9% 2.0% 2.5% 16.5x 15.3x 13.1x CCR CCRO3.SA R $ 17.92 R $ 13.00 NEUTRAL 22.3x 20.3x 15.8x 3.1% 4.1% 5.0% 8.7x 7.7x 6.7x VINCI SGEF.PA € $ 67.02 NR NR 16.4x 15.2x 14.1x 3.0% 3.2% 3.5% 8.8x 8.4x 8.0x Eiffage FOUG.PA € $ 69.45 NR NR 17.0x 14.6x 12.7x 2.3% 2.5% 2.9% 8.3x 8.0x 7.7x Atlantia ATL.MI € $ 22.40 NR NR 17.9x 16.5x 15.3x 4.4% 4.9% 5.4% 8.5x 8.1x 7.7x Cheung Kong Infrastructure 1038.HK HK $ 67.00 HK $ 81.00 OUTPERFORM 15.9x 16.1x 15.7x 3.4% 3.6% 3.7% NA NA NA Macquarie Infra MIC US $ 80.57 NR NR 58.5x 43.8x 39.3x 6.3% 6.9% 7.3% 9.8x 9.1x 9.0x Ferrovial FER.MC € $ 17.32 NR NR 28.7x 26.1x 24.0x 4.1% 4.3% 4.5% 19.1x 17.9x 17.1x Brookfield Infrastructure Partners LP BIP US $ 49.10 US $ 59.00 OUTPERFORM 40.2x 31.9x 26.5x 4.6% 5.1% 5.4% 7.0x 5.9x 5.6x Average 26.7x 22.9x 20.1x 3.8% 4.2% 4.6% 10.6x 9.8x 9.2x
Source: Company data, Credit Suisse, I/B/E/S
BIP owns electricity transmission assets in Latin America (Brazil and Chile) and in the US. With some legacy assets that were divested in other regions, we believe a comprehensive view of electricity transmission comps is useful as appears in Figure 42. Obviously,
Brookfield Infrastructure Partners LP (BIP.N) 38 22 August 2016
regulatory differences between the various jurisdictions along with some accounting distinctions can make the comparatives challenging at times.
Figure 42: Electric transmission comparables Price on P/E Div Yield EV/EBITDA Company Ticker Target Price Rating 19-Aug-16 2016 2017 2018 2016 2017 2018 2016 2017 2018 Alupar ALUP11.SA R $ 16.80 R $ 15.85 OUTPERFORM 13.1x 13.3x NA 5.4% 7.1% 8.8% 7.5x 7.1x 7.0x CTEEP TRPL4.SA R $ 65.80 NR NR 26.7x 10.0x 10.8x 3.4% 5.8% 5.7% 20.2x 9.8x 5.8x TAESA TAEE11.SAR $ 23.54 NR NR 8.6x 9.5x 10.9x 10.1% 9.3% 8.6% 8.4x 8.8x 9.8x LatAm Avg. 16.1x 10.9x 10.8x 6.3% 7.4% 7.7% 12.0x 8.6x 7.5x Eversource Energy ES US $ 55.54 NR NR 18.7x 17.5x 16.7x 3.2% 3.4% 3.7% 10.7x 10.1x 9.6x Hydro One Limited H.TO C $ 25.77 C $ 26.00 NEUTRAL 21.8x 20.6x 19.3x - 3.5% 3.6% 12.5x 11.8x 11.1x ITC Holdings ITC US $ 46.90 NR NR 22.1x 21.3x 19.4x 1.7% 1.9% 2.1% 13.5x 12.4x 11.4x North America Avg. 20.9x 19.8x 18.5x 2.5% 2.9% 3.1% 12.2x 11.4x 10.7x ESO ELI.BR € $ 47.24 NR NR 15.6x 13.7x 13.0x 3.4% 3.5% 3.7% 15.7x 14.2x 12.6x National Grid NG.L GBP 10.81 GBP 8.40 UNDERPERFORM 17.1x 16.9x 16.6x 4.0% 4.1% 4.2% 11.6x 11.3x 11.1x Red Electrica Co REE.MC € $ 19.40 NR NR 16.1x 15.5x 14.6x 4.4% 4.5% 5.0% 10.4x 10.1x 9.8x REN RENE.LS € $ 2.66 NR NR 14.0x 13.1x 12.6x 6.4% 5.9% 6.4% NA NA NA Terna TRN.MI € $ 4.60 € $ 4.10 UNDERPERFORM 16.0x 14.9x 14.7x 4.5% 4.6% 4.8% 11.3x 10.8x 10.6x European Avg. 15.8x 14.8x 14.3x 4.5% 4.5% 4.8% 12.2x 11.6x 11.0x
Source: Company data, I/B/E/S, Credit Suisse
One area for growth, largely by way of acquisition and embedded capex, has been the toll road sector. As a result, Figure 43 illustrates a sample of global toll road on a region-by- region basis. Given the nature of toll roads, the legal aspects of concessions and some of unique accounting, the metrics below may not be the most relevant. Yet, these metrics do provide very simple comparatives on standard valuation metrics.
Figure 43: Toll road comparables Price on P/E Div Yield EV/EBITDA Company Ticker Target Price Rating 19-Aug-16 2016 2017 2018 2016 2017 2018 2016 2017 2018 Brazil CCR CCRO3.SA R $ 17.92 R $ 13.00 NEUTRAL 22.3x 20.3x 12.1x 3.1% 4.1% 5.0% 8.7x 7.7x 6.7x Ecorod Infrt ECOR3.SA R $ 8.81 NR NR 23.0x 14.4x 11.2x 1.7% 4.0% 4.8% 6.1x 5.6x 5.0x
Europe Abertis ABE.MC € $ 13.60 NR NR 17.3x 17.0x 14.5x 5.2% 5.5% 5.9% 8.4x 7.9x 7.5x Atlantia ATL.MI € $ 22.40 NR NR 17.9x 16.5x 15.3x 4.4% 4.9% 5.4% 8.5x 8.1x 7.7x
Australia Macquarie Atlas MQA.AX A $ 5.77 A $ 5.60 OUTPERFORM 35.6x 25.5x 21.2x 3.1% 3.5% 3.9% NA NA NA Transurban TCL.AX A $ 11.74 A $ 12.50 OUTPERFORM NA 66.7x 52.2x 3.9% 4.3% 4.7% 26.1x 22.5x 20.0x
Korea MKIF 088980.KS ₩8,770.00 NR NR 20.8x 17.9x 12.4x 5.0% 6.3% 7.7% NA NA NA Indonesia Jasa Marga (Persero) TBK PT JSMR.JK IDR 5,100 IDR 8,800 OUTPERFORM 21.1x 21.2x 21.3x 1.2% 1.3% 1.2% 10.8x 9.8x 8.3x
China Anhui Expwy 0995.HK HK $ 6.86 NR NR 10.1x 10.1x 10.5x 4.3% 4.3% 4.1% 1.8x 1.8x 1.9x Cheung Kong Infrastructure 1038.HK HK $ 67.00 HK $ 81.00 OUTPERFORM 15.9x 16.1x 15.7x 3.4% 3.6% 3.7% NA NA NA Hopewell Infr 0737.HK HK $ 4.12 NR NR 17.6x 16.7x 17.0x 5.4% 5.6% 5.7% 9.6x 9.2x 9.0x Jiangsu Exwy 0177.HK HK $ 11.16 NR NR 16.2x 15.4x 14.6x 4.7% 4.9% 4.8% 3.4x 3.2x 3.1x Sichuan Exwy 0107.HK HK $ 2.79 NR NR 13.8x 9.2x 7.8x 1.8% 2.6% 3.1% 7.8x 6.6x 6.2x Zhejiang Express 0576.HK HK $ 8.82 NR NR 11.8x 11.3x 10.9x 4.9% 5.1% 5.3% 0.6x 0.6x 0.6x Average 18.7x 19.9x 16.9x 3.7% 4.3% 4.7% 8.4x 7.6x 6.9x
Source: Company data, Credit Suisse, I/B/E/S
BIP owns a variety of port assets around the world with various commodity, container and other exposures under various business frameworks. A series of port comparables appear in Figure 44.
Brookfield Infrastructure Partners LP (BIP.N) 39 22 August 2016
Figure 44: Ports comparables Price on P/E Div Yield EV/EBITDA Company Ticker Target Price Rating 19-Aug-16 2016 2017 2018 2016 2017 2018 2016 2017 2018 Santos BRP STBP11.SAR $ 14.40 NR NR NA 67.0x 72.0x 0.6% 0.1% 0.3% 13.4x 12.2x 11.6x Dalian Port 2880.HK HK $ 1.56 NR NR 18.9x 33.8x 32.6x 1.3% 1.3% 1.2% 18.2x NA NA SIPG 600018.SS HK $ 5.27 NR NR 18.8x 17.9x 17.1x 3.0% 3.1% 3.3% 10.6x 10.1x 11.3x Tianjin Port Dev 3382.HK HK $ 1.24 NR NR 8.2x 8.2x 8.1x 5.1% 5.0% 5.0% NA NA NA Xiamen Port 3378.HK HK $ 1.58 NR NR 10.6x 10.1x NA 3.6% 3.8% NA NA NA NA Port of Tauranga POT.NZ NZ $ 19.10 NZ $ 17.55 UNDERPERFORM 33.6x 29.8x 27.4x 2.8% 3.6% 3.9% 22.4x 19.5x 18.1x DP Wrld DPW.DI US $ 18.92 NR NR 17.0x 15.2x 13.1x 1.6% 1.8% 2.1% 10.7x 9.9x 9.2x Westshore Term WTE.TO C $ 20.73 NR NR 13.2x 13.9x NA 3.1% 3.1% 3.1% NA NA NA Average 17.2x 24.5x 28.4x 2.6% 2.7% 2.7% 15.1x 13.0x 12.5x
Source: Company data, Credit Suisse, I/B/E/S
BIP's rail assets are located in Australia and Brazil with different regulatory and contractual underpinnings. The comparables in Figure 45 give some broader perspective for this business group.
Figure 45: Rail comparables Price on P/E Div Yield EV/EBITDA Company Ticker Target Price Rating 19-Aug-16 2016 2017 2018 2016 2017 2018 2016 2017 2018 Canadian National CNI US $ 64.81 US $ 85.71 NEUTRAL 14.5x 13.3x 12.3x 2.4% 2.6% 2.7% 11.3x 10.8x 10.5x Canadian Pacific Railways CP US $ 152.43 US $ 224.56 OUTPERFORM 14.4x 12.5x 11.1x 1.2% 1.3% 1.4% 11.5x 10.7x 10.3x CSX Corporation CSX US $ 28.67 US $ 31.00 OUTPERFORM 16.4x 14.9x 13.5x 2.5% 2.7% 2.8% 8.1x 7.7x 7.3x Norfolk Southern NSC US $ 91.58 US $ 97.00 OUTPERFORM 16.8x 15.1x 13.6x 2.6% 2.7% 2.7% 8.8x 8.3x 7.8x Union Pacific UNP US $ 95.68 US $ 106.00 OUTPERFORM 19.0x 16.9x 15.3x 2.3% 2.5% 2.6% 9.9x 9.2x 8.7x Genesee & Wyoming, Inc. GWR US $ 68.66 US $ 73.00 OUTPERFORM 19.3x 17.8x 16.0x 0.0% 0.0% 0.0% 9.5x 8.8x 8.3x Kansas City Southern KSU US $ 99.07 US $ 101.00 NEUTRAL 20.7x 18.6x 17.1x 1.2% 1.3% 1.4% 11.3x 10.4x 9.7x Central Jpn Rail 9022 JPY 16,600 NR NR 9.7x 8.9x 8.6x 0.8% 0.8% 0.8% 6.0x 5.9x 5.8x East Japan Rail 9020 JPY 8,476 NR NR 13.5x 12.3x 11.6x 1.5% 1.6% 1.7% 6.8x 6.9x 6.7x Kintetsu GHD 9041 JPY 391 NR NR 25.7x 25.0x 23.2x 1.3% 1.3% 1.3% 15.6x 16.0x 15.4x Aurizon AZJ.AX A $ 4.57 A $ 4.65 NEUTRAL 18.7x 17.0x 16.9x 5.4% 5.6% 5.7% 8.9x 8.3x 8.2x Rumo Logística RUMO3.SA R $ 7.57 R $ 23.92 OUTPERFORM NA 55.3x 28.1x 0.0% 0.2% 0.8% 7.9x 6.7x 5.6x Average 17.2x 19.0x 15.6x 1.8% 1.9% 2.0% 9.6x 9.1x 8.7x
Source: Company data, Credit Suisse, I/B/E/S
From our perspective, there are really few true comparables to Brookfield's rather unique connections business in the UK. More network oriented businesses in the transmission sector might be the most appropriate comparatives (e.g. National Grid, Red Electric, Gas Natural Fenosa, Enagas, Terna, Snam, Pennon, Severn Trent and United Utilities). In any event, for the sake of completeness, we provide a broader comp perspective in Figure 46 for European utilities.
Figure 46: European utilities comparables Price on P/E Div Yield EV/EBITDA Company Ticker Target Price Rating 19-Aug-16 2016 2017 2018 2016 2017 2018 2016 2017 2018 Electric/Gas Utilities National Grid NG.L GBP 10.81 GBP 8.40 UNDERPERFORM 17.1x 16.9x 16.6x 4.0% 4.1% 4.2% 11.6x 11.3x 11.1x Centrica CNA.L GBP 2.37 GBP 2.70 OUTPERFORM 15.9x 14.8x 13.5x 5.2% 5.3% 5.4% 7.8x 7.6x 7.2x SSE SSE.L GBP 15.21 GBP 15.50 NEUTRAL 12.7x 13.0x 12.8x 5.9% 5.9% 6.1% 8.8x 9.3x 9.0x CEZ CEZP.PR CZK 423.10 CZK 386.00 NEUTRAL 11.8x 15.1x 17.8x 6.6% 5.3% 4.2% 5.9x 6.4x 6.8x RWE RWEG.F € $ 14.43 NR NR 14.2x 13.0x 13.8x 2.1% 2.2% 2.3% 3.0x 2.9x 3.0x Verbund VERB.VI € $ 13.47 € $ 8.20 UNDERPERFORM 18.6x 22.7x 23.5x 1.7% 1.4% 1.5% 10.5x 11.6x 11.5x E.ON EONGn.DE € $ 8.15 € $ 8.40 NEUTRAL 10.3x 11.3x 11.3x 4.6% 4.7% 4.6% 6.8x 6.9x 7.0x Fortum FUM1V.HE € $ 14.01 € $ 10.00 UNDERPERFORM 21.5x 21.5x 23.8x 5.4% 5.0% 5.0% 9.7x 9.7x 9.0x EDP EDP.LS € $ 2.99 € $ 3.60 NEUTRAL 11.8x 11.6x 10.7x 6.3% 6.3% 6.4% 7.6x 7.5x 7.4x Iberdrola IBE.MC € $ 5.86 € $ 6.90 OUTPERFORM 14.4x 14.0x 13.0x 5.0% 5.1% 5.4% 8.3x 8.1x 7.8x Snam SRG.MI € $ 4.96 € $ 4.70 NEUTRAL 16.5x 15.5x 15.0x 5.0% 5.1% 5.2% 11.7x 11.5x 11.2x Terna TRN.MI € $ 4.60 € $ 4.10 UNDERPERFORM 16.0x 14.9x 14.9x 4.5% 4.6% 4.8% 11.3x 10.8x 10.6x Enel ENEI.MI € $ 3.89 € $ 4.80 OUTPERFORM 12.5x 11.7x 10.2x 4.6% 5.1% 5.9% 5.2x 5.1x 4.9x Gas Natural Fenosa GAS.MC € $ 18.29 € $ 18.20 NEUTRAL 13.5x 13.1x 13.1x 5.4% 5.5% 5.8% 6.7x 6.6x 6.4x Red Electrica Co REE.MC € $ 19.40 NR NR 16.1x 15.5x 14.6x 4.4% 4.5% 5.0% 10.4x 10.1x 9.8x Enagas ENAG.MC € $ 26.37 NR NR 15.1x 14.7x 14.7x 5.2% 5.5% 5.8% 11.9x 12.2x 12.4x Average 14.9x 15.0x 15.0x 4.7% 4.7% 4.9% 8.6x 8.6x 8.4x Water Utilities United Utilities UU.L GBP 9.87 GBP 9.90 NEUTRAL 20.7x 21.8x 21.1x 3.9% 4.0% 4.0% 13.9x 13.3x 12.7x Pennon Group PNN.L GBP 8.94 GBP 8.15 UNDERPERFORM 22.7x 22.2x 21.0x 3.8% 4.0% 4.3% 12.1x 13.1x 12.4x Severn Trent SVT.L GBP 24.14 GBP 21.00 UNDERPERFORM 22.3x 23.5x 23.1x 3.3% 3.4% 3.5% 12.5x 12.4x 12.0x Average 21.9x 22.5x 21.7x 3.7% 3.8% 3.9% 12.9x 12.9x 12.4x
Source: Company data, Credit Suisse, I/B/E/S
Brookfield Infrastructure Partners LP (BIP.N) 40 22 August 2016
BIP has clear aspirations to grow a pipeline business under the right set or circumstances. At this time, BIP's pipeline exposure is focused with NGPL in the US. Figure 47 contains the selection of comparables with North American focus.
Figure 47: Pipelines comparables Price on P/E Div Yield EV/EBITDA Company Ticker Target Price Rating 19-Aug-16 2016 2017 2018 2016 2017 2018 2016 2017 2018 Boardwalk Pipeline Partners, LP BWP US $ 16.91 US $ 23.00 OUTPERFORM 14.7x 13.6x 12.3x 2.4% 2.7% 5.8% 9.6x 9.1x 8.5x Enterprise Products Partners, LP EPD US $ 26.81 US $ 34.00 NEUTRAL 21.3x 18.6x 17.2x 6.0% 6.3% 6.7% 14.6x 13.6x 12.7x Energy Transfer Partners, LP ETP US $ 41.00 US $ 52.00 OUTPERFORM 41.2x 17.2x 13.6x 10.9% 11.1% 11.5% 8.7x 7.4x 6.7x Holly Energy Partners, L.P. HEP US $ 32.27 NR NR 16.5x 15.6x 15.4x 7.3% 7.9% 8.4% 10.2x 9.1x 8.1x Kinder Morgan, Inc. KMI US $ 22.28 US $ 23.00 NEUTRAL 33.8x 29.9x 25.8x 2.2% 2.2% 3.0% 12.7x 12.3x 11.6x Plains All American Pipeline, LP PAA US $ 29.87 US $ 31.00 NEUTRAL 21.6x 17.4x 15.7x 8.7% 7.7% 7.8% 10.6x 9.7x 8.8x NuStar Energy, LP NS US $ 49.40 US $ 47.00 UNDERPERFORM 22.9x 20.2x 18.3x 8.9% 8.9% 8.9% 11.7x 11.1x 10.4x Energy Transfer Equity, LP ETE US $ 18.04 US $ 20.00 OUTPERFORM 17.5x 14.5x 11.5x 6.1% 6.1% 7.1% 9.6x 7.9x 7.1x Magellan Midstream Partners , LP MMP US $ 70.01 US $ 74.00 UNDERPERFORM 19.8x 18.5x 17.3x 4.7% 5.1% 5.6% 16.5x 15.1x 14.0x NuStar GP Holdings, LLC NSH US $ 25.35 US $ 24.00 NEUTRAL 17.3x 16.3x 15.5x 8.6% 8.6% 8.7% 15.3x 14.8x 14.4x Spectra Energy Partners, LP SEP US $ 46.48 US $ 57.00 NEUTRAL 14.4x 12.7x 13.0x 5.7% 6.2% 6.6% 10.4x 9.0x 8.3x Average 21.9x 17.7x 16.0x 6.5% 6.6% 7.3% 11.8x 10.8x 10.1x
Source: Company data, Credit Suisse, I/B/E/S
BIP's most recent platform addition is communication towers that may benefit from a large acquisition in the future. This business line has a very North American centric comparable focus as appears in Figure 48.
Figure 48: Communication towers comparables Price on P/E Div Yield EV/EBITDA Company Ticker Target Price Rating 19-Aug-16 2016 2017 2018 2016 2017 2018 2016 2017 2018 American Tower Corp AMT.N US $ 113.61 NR NR 55.7x 40.9x 33.3x 1.9% 2.3% 2.8% 18.5x 16.8x 15.6x Crown Castle International Corp CCI.N US $ 93.37 NR NR NA 64.9x 56.7x 3.8% 4.1% 4.4% 19.7x 18.7x 17.6x EI Towers EIT.MI € $ 46.00 € $ 59.00 NEUTRAL 26.5x 22.9x 19.7x 3.2% 4.6% 4.1% 11.9x 11.1x 10.4x SBA Communications Corp SBAC.OQ US $ 113.21 NR NR NA NA 68.0x 0.0% 0.0% 0.0% 20.2x 18.8x 17.5x Average 41.1x 42.9x 44.4x 2.2% 2.7% 2.8% 17.6x 16.3x 15.3x
Source: Company data, Credit Suisse, I/B/E/S
With these comparable companies out of the way, we address a number of the valuation approaches for considering BIP's unit value in the next section. Valuation Parameters Our valuation section is divided into three parts: ■ Multiple metrics; ■ A yield analysis; and, ■ Net Asset Value. Each of these areas is addressed in more detail below. Multiple metrics Naturally, we believe there is utility in considering BIP on conventional valuation metrics as presented in this section of the note with a particular focus on P/E, EV/EBITDA and P/CF. Figure 49 and Figure 50 show the 1 and 2-year forward P/E charts for BIP, respectively.
Brookfield Infrastructure Partners LP (BIP.N) 41 22 August 2016
Figure 49: BIP historical 1-year forward P/E Figure 50: BIP historical 2-year forward P/E
250 1,200 1,000 200 800 150 600 E E / / P P
400 d d r r 100 a a w w 200 r r o o F F
50 r r 0 Y Y - - 8 8 9 9 0 0 1 1 2 2 3 3 4 4 5 5 6 6 2 1 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1
-200 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 / / / / / / / / / / / / / / / / / / 8 8 9 9 0 0 1 1 2 2 3 3 4 4 5 5 6 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -400 / / / / / / / / / / / / / / / / / / 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7
-50 / / / / / / / / / / / / / / / / / 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 -600 / / / / / / / / / / / / / / / / / 2 8 2 8 2 8 2 8 2 8 2 8 2 8 2 8 2 -100 -800
Source: Thomson One Source: Thomson One
Figure 51 and Figure 52 illustrate BIP's one and two-year forward EV/EBITDA historical valuations, respectively.
Figure 51: BIP historical 1-year forward EV/EBITDA Figure 52: BIP historical 2-year forward EV/EBITDA
20 20 18 18 A A
D 16 D 16 T T I I B B
E 14 E 14 / / V V E E
12 12 d d r r
a 10 a 10 w w r r
o 8 o 8 F F
r r
Y 6 Y 6 - - 1 2 4 4 2 2 9 0 1 2 3 4 5 6 9 0 1 2 3 4 5 6 9 0 1 2 3 4 5 9 0 1 2 3 4 5 0 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 0 1 1 1 1 1 1 0 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1
Source: Thomson One Source: Thomson One
Figure 53 and Figure 54 illustrate BIP's one and two-year forward P/CF historical valuations, respectively.
Figure 53: BIP historical 1-year forward P/CF Figure 54: BIP historical 2-year forward P/CF
34 18
29 16 F F
C C 14 / 24 / P P
d d
r r 12 a a
w 19 w r r
o o 10 F F
r r
Y 14 Y - - 8 1 2
9 6
4 4 8 8 9 9 0 0 1 1 2 2 3 3 4 4 5 5 6 6 8 8 9 9 0 0 1 1 2 2 3 3 4 4 5 5 6 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 2 8 2 8 2 8 2 8 2 8 2 8 2 8 2 8 2
Source: Thomson One Source: Thomson One
To provide a better context to these charts, Figure 55 summaries some of the descriptive statistics for P/E, EV/EBITDA and P/CF. In addition to these statistics, we provide implied BIP values based on mean and median values. Of these metrics, EV/EBITDA is one of the
Brookfield Infrastructure Partners LP (BIP.N) 42 22 August 2016
more challenging to apply given differences in treatment of the BAM ownership position and the non-controlling interest among various data providers.
Figure 55: Summary of valuation with implied valuation EV/EBITDA EV/EBITDA 2- P/E 1-Yr P/E 2-Yr 1-Yr Yr P/CF 1-Yr P/CF 2-Yr Mean 35.9x 41.0x 12.1x 10.6x 12.8x 10.7x Median 35.7x 26.5x 12.9x 11.4x 12.2x 10.6x Min -70.8x -552.6x 4.1x 3.2x 6.0x 7.8x Max 200.4x 928.0x 18.3x 17.4x 32.0x 16.7x
CS Estimate 1.70 2.24 1,154 1,526 4.10 4.60 Illustrative unit price 60.93 91.92 19.17 27.52 52.57 49.37
Source: Company data, Credit Suisse estimates
Metric divergence The significant dispersion of illustrative unit prices from these metrics highlights one of the clear challenges with many analytical approaches to Brookfield valuation. As a result and consistent with analytics for a number of our companies under coverage, we believe there is a clear focus on many yield related valuation approaches. With the ongoing yield focus in capital markets and some of BIP's more unique aspects of the accounting and structure, we believe significant emphasis should be placed on yield related analysis. We highlight these issues in the next section.
A yield analysis A yield focus We continue to believe the dividend discount model is an extremely useful analytical tool with infrastructure companies – albeit one that is extremely sensitive. Most recently, in the Q2 results, BIP announced a US$0.59 quarterly distribution which translates into US$2.36 on an annualized basis. Figure 56 provides an illustrative view of theoretical unit prices at different distributions and targeted yields for some perspective.
Figure 56: Illustrative unit price at different distribution and yield Distribution 2.10 2.20 2.30 2.40 2.50 2.60 2.70 2.80 2.90 3.0% 70.00 73.33 76.67 80.00 83.33 86.67 90.00 93.33 96.67 3.5% 60.00 62.86 65.71 68.57 71.43 74.29 77.14 80.00 82.86 4.0% 52.50 55.00 57.50 60.00 62.50 65.00 67.50 70.00 72.50 4.5% 46.67 48.89 51.11 53.33 55.56 57.78 60.00 62.22 64.44 d l 5.0% 42.00 44.00 46.00 48.00 50.00 52.00 54.00 56.00 58.00 e i
Y 5.5% 38.18 40.00 41.82 43.64 45.45 47.27 49.09 50.91 52.73 6.0% 35.00 36.67 38.33 40.00 41.67 43.33 45.00 46.67 48.33 6.5% 32.31 33.85 35.38 36.92 38.46 40.00 41.54 43.08 44.62 7.0% 30.00 31.43 32.86 34.29 35.71 37.14 38.57 40.00 41.43 7.5% 28.00 29.33 30.67 32.00 33.33 34.67 36.00 37.33 38.67
Source: Company data, Credit Suisse estimates
To provide some perspective on the valuation sensitivity of the DDM, Figure 57 contains a matrix to assess share values.
Brookfield Infrastructure Partners LP (BIP.N) 43 22 August 2016
Figure 57: Illustrative BIP stock prices at various discount and dividend growth rates Cost of equity 67.429 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 13.0% 14.0% 15.0% 3.0% 59.00 47.20 39.33 33.71 29.50 26.22 23.60 21.45 19.67 3.5% 67.43 52.44 42.91 36.31 31.47 27.76 24.84 22.48 20.52 4.0% 78.67 59.00 47.20 39.33 33.71 29.50 26.22 23.60 21.45
e 4.5% 94.40 67.43 52.44 42.91 36.31 31.47 27.76 24.84 22.48 t a
r 5.0% 118.00 78.67 59.00 47.20 39.33 33.71 29.50 26.22 23.60
h t 5.5% 157.33 94.40 67.43 52.44 42.91 36.31 31.47 27.76 24.84 w
o 6.0% r 236.00 118.00 78.67 59.00 47.20 39.33 33.71 29.50 26.22 g 6.5% 472.00 157.33 94.40 67.43 52.44 42.91 36.31 31.47 27.76 n o i
t 7.0% N/A 236.00 118.00 78.67 59.00 47.20 39.33 33.71 29.50 u
b 7.5% (472.00) 472.00 157.33 94.40 67.43 52.44 42.91 36.31 31.47 i r t
s 8.0% (236.00) N/A 236.00 118.00 78.67 59.00 47.20 39.33 33.71 i
D 8.5% (157.33) (472.00) 472.00 157.33 94.40 67.43 52.44 42.91 36.31 9.0% (118.00) (236.00) N/A 236.00 118.00 78.67 59.00 47.20 39.33 9.5% (94.40) (157.33) (472.00) 472.00 157.33 94.40 67.43 52.44 42.91 10.0% (78.67) (118.00) (236.00) N/A 236.00 118.00 78.67 59.00 47.20
Source: Company data, Credit Suisse estimates
BIP historical and consensus forward distribution and growth is in Figure 58.
Figure 58: Historical and consensus distribution 2008* 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Distribution 0.88 1.06 1.10 1.32 1.50 1.72 1.92 2.12 2.32 2.57 2.78 Growth 3.8% 20.0% 13.6% 14.7% 11.6% 10.4% 9.4% 10.6% 8.3%
Note: estimates from Bloomberg. *Prorated from spin-off. Source: Company data, the BLOOMBERG PROFESSIONAL™ service
Notably, our calculated historical "k" is 16.6% for BIP with a growth rate of 11.9% (2011- 2016). We view this "k" as being undemanding from a valuation perspective – especially with the growth rate being delivered from BIP. We continue to believe the dividend discount model is a powerful method of financial analysis – especially when examined over a period of time. Yet, as with many other methods of valuation, this approach should not be considered in isolation. From our perspective, one of the better ways to anchor yield related valuation approaches is against the 10-year bond yield. Accordingly, we present the US 10-year bond yield in Figure 59, the individual stock dividend yield in Figure 60 and the yield spread in Figure 61.
Figure 59: US 10-year yield (%) Figure 60: BIP distribution yield (%)
4.5 13.0 12.0 4.0 11.0 3.5 10.0 3.0 9.0 % % 8.0 2.5 7.0 2.0 6.0 5.0 1.5 4.0 1.0 3.0 8 8 9 9 0 1 1 2 2 3 3 4 4 5 6 8 8 9 9 0 1 1 2 2 3 3 4 4 5 6 9 0 2 4 5 9 0 2 4 5 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 0 1 1 1 1 0 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / 8 8 8 1 1 1 1 1 0 0 0 8 1 1 1 8 8 8 1 1 1 1 1 0 0 0 8 1 1 1 1 1 0 1 1 1 1 0 1 1 3 3 3 3 3 3 3 3 3 3 2 2 2 3 3 3 3 3 3 3 3 2 3 3 3 2 2 2 3 3 3 3 3 3 3 3 2 3 3 3 / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / 4 9 2 7 5 3 8 1 6 4 9 2 7 5 3 4 9 2 7 5 3 8 1 6 4 9 2 7 5 3 2 0 1 2 0 2 0 1 2 0 1 1 1 1 1 1 1 1 1 1
Source: Bloomberg Source: Bloomberg
Brookfield Infrastructure Partners LP (BIP.N) 44 22 August 2016
Figure 61: Distribution yield spread (bps) 1,000 900 800 700
s 600 p b 500 400 300 200 100 8 9 0 1 2 3 4 5 6 8 9 0 1 2 3 4 5 0 0 1 1 1 1 1 1 1 0 0 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 / / / / / / / / / / / / / / / / / 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 / / / / / / / / / / / / / / / / / 4 4 4 4 4 4 4 4 4 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1
Source: Bloomberg
Yield related metrics There are clearly limitations with yield spread analyses as trading multiples and the yield are very sensitive itself will tend to have a floor and ceiling of reasonability. Beyond those points, the valuation metric tends to be much less valuable. With that caveat, we provide descriptive statistics for BIP's distribution yield along with the 10-year for the last 8-years.
Figure 62: BIP yield / yield spread descriptive statistics BIP US 10-Yr (%) BIP (%) Spread (bps) Mean 2.59 5.55 295 Median 2.51 5.13 275 Min 1.36 3.89 118 Max 4.27 12.33 937
Source: Bloomberg
On a mean or median basis, the spread relationships imply a BIP share price of roughly US$48 on a 2016 US$2.36 distribution using a forward 2.0% US 10-year. At the current Calling for 1.57% US 10-year, the historic mean and median spreads imply BIP unit prices of roughly compression US$52/sh and US$55/sh, respectively on the 2016 dividend level. Clearly, the sensitivity of this method is rather extreme in the current rate environment. In our view, there is room for some compression on the historical mean and median figures for BIP. To provide a bit of comparative perspective on the dividend growth and trading yields, we summarize some of the consensus data for a selection of the Canadian and infrastructure specific relevant entities in Figure 63.
Brookfield Infrastructure Partners LP (BIP.N) 45 22 August 2016
Figure 63: Infrastructure comparables (yield and dividend/distribution growth) Year-over-year growth Dividend Current Yield 2017 2018 2019 Abertis Infraestructuras SA 4.80% 6.8% 4.9% 6.0% Atlantia SPA 3.90% 10.4% 10.4% 10.4% Brookfield Infrastructure Partners LP 4.72% 10.6% 8.3% NA CCR SA 1.57% 31.3% 28.9% 24.4% Cheung Kong Infrastructure 3.21% 4.4% 4.8% NA Eiffage 2.16% 11.9% 14.3% 57.3% Enbridge Inc. 3.93% 10.6% 10.4% 3.6% Enbridge Income Fund 5.79% 7.9% 8.2% 0.3% Emera Inc. 4.33% 8.3% 7.0% 7.8% Ferrovial SA 3.56% 4.4% 3.9% 13.8% Fortis Inc. 3.49% 6.1% 5.6% 6.3% Macquarie Infrastructure 6.19% 9.2% 5.9% 6.0% Pembina Pipeline 4.84% 6.8% 7.7% 4.0% Qube Holdings 2.93% 5.8% 23.6% 0.0% TransCanada Corp. 3.70% 8.1% 8.2% 3.3% Vinci SA 2.81% 7.8% 7.9% 8.1% Average 3.87% 9.4% 10.0% 10.8%
Source: the BLOOMBERG PROFESSIONAL™ service
In light of the growth and the valuation parameters a targeted distribution yield of 4% with a 200bps spread is a viable valuation for BIP's units. NAV dynamics NAV limitations Given BIP's relatively unique structure, global footprint and asset mix, our long held view is a Net Asset Valuation approach should help provide a meaningful context for stock market valuation. As BIP's business continues to grow in each of the verticals, some challenges with a NAV approach, include: a multiplication of regulatory nuances; cross-border issues; a multitude of business drivers; the impact of financial forecasts; balancing organic, capital recycling and acquisition activities; and, among other things, sensitivities around multiple selection for each of the major business groups. Therefore, we believe the NAV's utility is somewhat decreasing as BIP's business model matures with an appreciable amount of underlying organic growth. With that backdrop, we still believe a NAV is useful in providing valuation perspective. As a result, Figure 64 contains our BIP NAV of roughly US$58 that is somewhat supported by our targeted 4.00% distribution yield.
Brookfield Infrastructure Partners LP (BIP.N) 46 22 August 2016
Figure 64: BIP NAV in millions, unless otherwise stated EBITDA Multiple Value ($m) Value/Unit Utilities Regulated Terminal 162 12.5x 2,023.9 11.29 Electricity Transmission 145 12.5x 1,807.0 7.85 Regulated Distribution 272 12.5x 3,397.2 14.76 33.90
Transport Railroad 300.6 10.0x 3,005.8 13.06 Ports 190.6 12.0x 2,287.4 9.94 Toll Roads 241.9 8.0x 1,935.5 8.41 31.40 Energy Energy Transmission & Distribution 273.3 12.0x 3,279.2 14.24 District Energy 64.1 12.0x 769.2 3.34 Brazilian Natural Gas Pipelines 140.0 12.0x 1,680.0 7.30 24.88
Communication Infrastructure 79.4 16.0x 1,270.0 5.52
Less Attributable debt & Preferred Units 8,546.0 37.12
Total value of parts 95.70 Less attributable debt 37.12 58.58
Source: Company data, Credit Suisse estimates
A point worth noting in relation to our NAV is that we include a valuation of US$7.30/unit for the prospectively acquired Brazilian Natural Gas Pipeline network. Yet, at this time, our financial forecasts do not incorporate this potential acquisition. If a deal is consummated, then we will obviously incorporate that data into our financial estimates beyond the NAV. M&A could meaningful In light of BAM's fund raising and BIP's well known progress on certain M&A initiatives, we impact the NAV further delineate the potential option value associated with large scale capital deployments and the impact on the NAV. More specifically, we consider the following hypothetical: ■ US$2bn of incremental capital deployment; ■ A 50/50 debt and equity capital structure; ■ A going-in FFO yield of 10%; ■ An AFFO yield of 8%; ■ A 65% distribution payout; ■ A 4.00% yield; ■ Assume unit price at US$49; and, ■ Incremental equity capital from market access. Under these assumptions, Figure 65 shows an accretion matrix that can be considered in conjunction with a hypothetical transaction. Such potential transactions are important to keep in mind given the significant influence of BAM's private fund business on part of BIP's future growth potential. An important caveat to note is Figure 65 solely focuses on the unit price accretion from a hypothetical transaction. Given the multitude of variables (primarily the number of units issued and the price), the table does not directly consider the impact of an increased unit count on the existing in place units (fully diluted).
Brookfield Infrastructure Partners LP (BIP.N) 47 22 August 2016
Figure 65: Illustrative unit price accretion Capital Deployed (US$m) 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 2% 0.35 0.68 0.99 1.30 1.59 1.87 2.14 2.40 2.65 4% 0.69 1.35 1.99 2.59 3.18 3.74 4.28 4.80 5.30
) 6% 1.04 2.03 2.98 3.89 4.77 5.61 6.42 7.20 7.94 % (
8% 1.38 2.70 3.97 5.19 6.35 7.48 8.56 9.59 10.59 d l 10% 1.73 3.38 4.96 6.48 7.94 9.35 10.69 11.99 13.24 e i
Y 12% 2.07 4.06 5.96 7.78 9.53 11.21 12.83 14.39 15.89
O 14% 2.42 4.73 6.95 9.08 11.12 13.08 14.97 16.79 18.54 F
F 16% 2.76 5.41 7.94 10.37 12.71 14.95 17.11 19.19 21.19 18% 3.11 6.08 8.94 11.67 14.30 16.82 19.25 21.59 23.83 20% 3.45 6.76 9.93 12.97 15.89 18.69 21.39 23.98 26.48
Source: Company data, Credit Suisse estimates
No credit for In any event, we do not provide credit for hypothetical transactions, however, the potential hypothetical financial impact is important to understand and appreciate. As more details become transactions available and prospective deals possibly move ahead, then we will integrate our baseline assumptions and related work into our BIP financial forecasts. In any event, we believe BIP's advanced deals may help meaningfully re-rate the stock. Despite this potential, we believe the focus on BIP's valuation should not be on the M&A pipeline, but rather the organic growth from the existing assets.
Valuation summary We reinstate BIP coverage with a US$59.00 target price and an Outperform rating. Some of the key points underlying our reinstatement of coverage include: ■ We believe the Street underestimates the underlying organic growth from BIP's existing asset base along with increasing network benefits; ■ On our forecasts, BIP generates double digit FFO growth over the next three years; ■ That projected FFO growth translates into an average of 10% distribution growth; ■ We do not forecast acquisitions and believe BIP's baseline growth is often overlooked given abundant M&A opportunities; ■ As with all Brookfield Group members, BIP's possesses advantages from an extremely flexible funding model that can help deliver outsized M&A; ■ That M&A potential should be considered in relation to NAV or distribution growth that can translate into roughly US$6.48/unit of value creation for US$2bn of EV deployment (US$1bn of equity) on our assumptions; BIP's business matured ■ Our US$59 target price is partly supported by a 4% targeted distribution yield; with more organic growth versus M&A ■ For many reasons, we believe a NAV approach provides some useful valuation context for the BIP, however, the utility of this method is declining with the firm's growth; ■ Our NAV exceeds US$58, however, we include US$7.30/unit for the potential Brazilian pipeline network (yet do not include that potential deal impact in our financials); and, ■ This apparent valuation delta between two methodologies highlights the combination of yield attraction and challenges with a precise NAV approach. Fundamentally, we believe BIP's business model has matured with a more visible pipeline of organic growth from the existing asset base. That growth translates into less reliance on M&A, however, the Brookfield private funds business may clearly assist in providing value beyond the current market expectations. We reinstate coverage with an Outperform rating and a US$59.00 target price. Our Credit Suisse RAVE powered financial valuation summary appears below (Figure 66).
Brookfield Infrastructure Partners LP (BIP.N) 48 22 August 2016
Figure 66: BIP selected historical valuations Brookfield Infrastructure Partners LP PE Median 28.1 Brookfield Infrastructure Partners LP PE relative Median 2.0
800.00 60.00 50.00 600.00 40.00 400.00 30.00 20.00 200.00 10.00 0.00 0.00 1-Jan-09 1-Jan-11 1-Jan-13 1-Jan-15 -10.010-Jan-09 1-Jan-11 1-Jan-13 1-Jan-15 -200.00 -20.00 -400.00 -30.00 -40.00 -600.00 -50.00
Source: Credit Suisse estimates, IBES Source: Credit Suisse estimates, IBES
Brookfield Infrastructure Partners LP P/CF Median 11.4 Brookfield Infrastructure Partners LP P/Book Median 2.0
18.00 7.00 16.00 6.00 14.00 5.00 12.00 10.00 4.00 8.00 3.00 6.00 2.00 4.00 2.00 1.00 0.00 0.00 1-Jan-09 1-Jan-11 1-Jan-13 1-Jan-15 1-Jan-09 1-Jan-11 1-Jan-13 1-Jan-15
Source: Credit Suisse estimates, IBES Source: Credit Suisse estimates, IBES
Source: Credit Suisse RAVE
Figure 67 and Figure 68 put our BIP rating and target into context.
Figure 67: Total return forecast in perspective Figure 68: Total return forecast in perspective 40% 63.3 CS tgt^ 30% 57.9 20% CS tgt^ Mean^ 10% Mean^ 52.6 Sh Prc 0% Sh Prc 47.2 -10% 41.8 -20% -30% 36.5 -40% 31.1 12mth Volatility* 52wk Hi-Lo IBES Consensus 12mth Volatility* 52wk Hi-Lo IBES Consensus target return^ target return^
Source: I/B/E/S, Credit Suisse; * = Annualized stdev of weekly total return over 12 months; ^ Source: I/B/E/S, Credit Suisse; * = Annualized stdev of weekly total return over 12 months; ^ = Capital gain/loss + forecast dividend yield; Bands denote ±1σ. = Capital gain/loss + forecast dividend yield; Bands denote ±1σ.
Brookfield Infrastructure Partners LP (BIP.N) 49 22 August 2016
Companies Mentioned (Price as of 19-Aug-2016) Abertis (ABE.MC, €13.6) AltaGas (ALA.TO, C$34.71) Alupar (ALUP11.SA, R$16.8) American Tower Corp (AMT.N, $113.61) Anhui Expwy (0995.HK, HK$6.86) Asciano Limited (AIO.AX, A$8.259911) Atlantia (ATL.MI, €22.4) Aurizon (AZJ.AX, A$4.57) Boardwalk Pipeline Partners, LP (BWP.N, $16.91) Boralex (BLX.TO, C$19.21) Brookfield Asset Management (BAM.N, $34.19, NEUTRAL, TP $36.0) Brookfield Infrastructure Partners LP (BIP.N, $49.1, OUTPERFORM, TP $59.0) Brookfield Renewable Partners (BEP_u.TO, C$39.74, NEUTRAL, TP C$44.0) CCR (CCRO3.SA, R$17.92) CEZ (CEZP.PR, Kč423.1) CSX Corporation (CSX.OQ, $28.67) Canadian National (CNI.N, $64.81) Canadian Pacific Railways (CP.N, $152.43) Canadian Utilities Limited (CU.TO, C$38.94) Capital Power Corporation (CPX.TO, C$21.49) Central Japan Railway Company (9022.T, ¥16,600) Centrica (CNA.L, 237.0p) Cheung Kong Infrastructure (1038.HK, HK$67.0) Crown Castle International Corp (CCI.N, $93.37) DP World (DPW.DI, $18.92) Dalian Port (PDA) Co (2880.HK, HK$1.56) E.ON (EONGn.DE, €8.15) EDP (EDP.LS, €2.99) EI Towers (EIT.MI, €46.0) ESO (ELI.BR, €47.235) East Japan Railway Company (9020.T, ¥8,476) Ecorodovias S.A. (ECOR3.SA, R$8.81) Eiffage (FOUG.PA, €69.45) Emera Inc. (EMA.TO, C$47.78) Enagas (ENAG.MC, €26.37) Enbridge Inc. (ENB.TO, C$53.52) Enbridge Income Fund Holdings (ENF.TO, C$32.2) Enel (ENEI.MI, €3.89) Energy Transfer Equity, LP (ETE.N, $18.04) Energy Transfer Partners, LP (ETP.N, $41.0) Enterprise Products Partners, LP (EPD.N, $26.81) Eversource Energy (ES.N, $55.54) Ferrovial SA (FER.MC, €17.32) Fortis Inc. (FTS.TO, C$42.95) Fortum (FUM1V.HE, €14.01) Gas Natural Fenosa (GAS.MC, €18.28) Genesee & Wyoming, Inc. (GWR.N, $68.66) Gibson Energy Inc. (GEI.TO, C$17.55) Holly Energy Partners, L.P. (HEP.N, $32.27) Hopewell Infr (0737.HK, HK$4.12) Hydro One Limited (H.TO, C$25.77) ITC Holdings Corp (ITC.N, $46.9) Iberdrola (IBE.MC, €5.86) Innergex (INE.TO, C$14.62) Inter US (IPL.TO, C$27.75) Jasa Marga (Persero) TBK PT (JSMR.JK, Rp5,100) Jiangsu Exwy (0177.HK, HK$11.16) Kansas City Southern (KSU.N, $99.07) Keyera Corp. (KEY.TO, C$40.34) Kinder Morgan, Inc. (KMI.N, $22.28) Kintetsu GHD (9041.T, ¥391) Macquarie Atlas (MQA.AX, A$5.77) Macquarie Infra (MIC.N, $80.57) Macquarie Korea Infrastructure Fund (088980.KS, W8,770) Magellan Midstream Partners , LP (MMP.N, $70.01) National Grid (NG.L, 1080.5p) Niska Gas Storage Partners, LLC (NKA.N^G16, $4.21, NEUTRAL, TP $4.0) Norfolk Southern (NSC.N, $91.58) North Power (NPI.TO, C$24.7) NuStar Energy, LP (NS.N, $49.4) NuStar GP Holdings, LLC (NSH.N, $25.35) Pembina Pipeline Corporation (PPL.TO, C$39.24) Pennon Group (PNN.L, 894.0p) Petrobras (PBR.N, $9.43, UNDERPERFORM[V], TP $2.0) Plains All American Pipeline, LP (PAA.N, $29.87) Port of Tauranga (POT.NZ, NZ$19.1) Qube Holdings Limited (QUB.AX, A$2.69) REN (RENE.LS, €2.656) RWE (RWEG.F, €14.43) Red Electrica (REE.MC, €19.395) Rumo Logística (RUMO3.SA, R$7.57) SBA Communications Corp (SBAC.OQ, $113.21) SSE (SSE.L, 1521.0p) Santos Brasil S.A. (STBP11.SA, R$14.4) Severn Trent (SVT.L, 2414.0p) Shanghai International Port Co.,Ltd (600018.SS, Rmb5.27) Sichuan Exwy (0107.HK, HK$2.79) Brookfield Infrastructure Partners LP (BIP.N) 50 22 August 2016
Snam (SRG.MI, €4.96) Spectra Energy Partners, LP (SEP.N, $46.48) TAESA (TAEE11.SA, R$23.54) Terna (TRN.MI, €4.6) Tianjin Port Developments Holdings Ltd (3382.HK, HK$1.24) TransAlta (RNW.TO, C$14.46) TransAlta Corporation (TA.TO, C$5.73) TransCanada Corp. (TRP.TO, C$61.21) Transmissao Paulista (TRPL4.SA, R$65.8) Transurban (TCL.AX, A$11.74) Union Pacific (UNP.N, $95.68) United Utilities (UU.L, 986.5p) VINCI (SGEF.PA, €67.02) Verbund (VERB.VI, €13.46) Veresen (VSN.TO, C$12.61) Westshore Term (WTE.TO, C$20.73) Xiamen International Port Co. (3378.HK, HK$1.58) Zhejiang Express (0576.HK, HK$8.82)
Disclosure Appendix Important Global Disclosures I, Andrew M. Kuske, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Brookfield Asset Management (BAM.N)
BAM.N Closing Price Target Price Target Price Closing Price BAM.N Date (US$) (US$) Rating 40 26-Aug-13 22.88 24.90 N 14-Apr-14 27.41 27.52 35 08-Jul-14 28.75 28.83 30-Jan-15 33.40 32.76 30 27-Apr-15 36.26 R 04-May-15 35.65 36.69 N 25 15-Jul-15 34.92 37.34 20 04-Feb-16 28.99 35.38 1- Jan- 14 1- Jul- 14 1- Jan- 15 1- Jul- 15 1- Jan- 16 1- Jul- 16 22-Apr-16 33.17 36.00 N EU T RA L * Asterisk signifies initiation or assumption of coverage. REST RICT ED
3-Year Price and Rating History for Brookfield Infrastructure Partners LP (BIP.N)
BIP.N Closing Price Target Price Target Price Closing Price BIP.N Date (US$) (US$) Rating 55 26-Aug-13 35.98 40.00 N 31-Jan-14 36.79 42.00 50 18-Nov-14 40.80 46.00 O 45 18-Feb-15 44.75 46.00 N 07-Jul-15 44.81 52.00 O 40 29-Oct-15 41.95 R 35 05-Aug-16 48.93 NR 30 * Asterisk signifies initiation or assumption of coverage. 1- Jan- 14 1- Jul- 14 1- Jan- 15 1- Jul- 15 1- Jan- 16 1- Jul- 16
N EU T RA L O U T PERFO RM REST RICT ED N O T RA T ED
Brookfield Infrastructure Partners LP (BIP.N) 51 22 August 2016
3-Year Price and Rating History for Brookfield Renewable Partners (BEP_u.TO)
BEP_u.TO Closing Price Target Price Target Price Closing Price BEP_u.TO Date (C$) (C$) Rating 45 26-Aug-13 28.25 33.00 O 18-Oct-13 27.98 32.00 40 14-Apr-14 31.65 32.00 N 29-May-14 32.50 R 35 08-Jul-14 31.32 32.00 N 30-Jan-15 41.14 38.00 30 12-May-15 37.83 38.00 U 25 15-Jul-15 36.74 38.00 N 1- Jan- 14 1- Jul- 14 1- Jan- 15 1- Jul- 15 1- Jan- 16 1- Jul- 16 23-Jul-15 36.13 40.00 14-Jan-16 32.76 R O U T PERFO RM N EU T RA L 04-Feb-16 36.37 40.00 N REST RICT ED 22-Jul-16 40.50 44.00 U N D ERPERFO RM * Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for Niska Gas Storage Partners, LLC (NKA.N^G16)
NKA.N^G16 Closing Price Target Price Target Price Closing Price NKA.N^ G16 Date (US$) (US$) Rating 21 31-Oct-13 15.80 14.00 U 31-Oct-14 5.79 8.00 16 08-Dec-14 3.44 7.00 03-Feb-15 2.85 3.00 11 15-Jun-15 3.97 4.00 N 6 * Asterisk signifies initiation or assumption of coverage.
1 1- Jan- 14 1- Jul- 14 1- Jan- 15 1- Jul- 15 1- Jan- 16 1- Jul- 16
U N D ERPERFO RM N EU T RA L
3-Year Price and Rating History for Petrobras (PBR.N)
PBR.N Closing Price Target Price Target Price Closing Price PBR.N Date (US$) (US$) Rating 27 28-Oct-13 17.35 25.00 O 01-Dec-13 15.94 14.00 U 22 11-Mar-14 10.54 14.00 N 17 14-Dec-14 7.11 7.30 * 08-Feb-15 6.54 5.00 U 12 29-Jun-15 9.03 6.00 7 11-Sep-15 4.56 3.00 2 11-Jan-16 3.71 2.00 * 1- Jan- 14 1- Jul- 14 1- Jan- 15 1- Jul- 15 1- Jan- 16 1- Jul- 16 * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM U N D ERPERFO RM N EU T RA L
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings
Brookfield Infrastructure Partners LP (BIP.N) 52 22 August 2016 are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 54% (43% banking clients) Neutral/Hold* 30% (20% banking clients) Underperform/Sell* 16% (38% banking clients) Restricted 0% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Brookfield Asset Management (BAM.N) Method: We obtain our Neutral rating and US$36 target price for Brookfield Asset Management by the net asset value (NAV) approach. Our BAM NAV valuation includes: (a) a 10% holding company discount on projected public LP values; (b) a 20x cash flow multiple on base LP fees and IDRs; (c) 10x cash flow multiple on the residual power business; and, (d) other multiples on the remaining business groups. We rate Brookfield Asset Management Neutral as the total return we project is in line with our coverage. Risk: Risks to our US$36 target price and Neutral rating for Brookfield Asset Management are underlying investment value; increasing competition; potential taxation changes; credit and counterparty risks; regulation; interest rate movements; foreign exchange; and, selected energy market dynamics. Target Price and Rating Valuation Methodology and Risks: (12 months) for Brookfield Infrastructure Partners LP (BIP.N) Method: We obtain our Outperform rating and 12-month US$59.00 target price for Brookfield Infrastructure Partners LP by using multiple valuation methods, primarily: a targeted cash-on-cash distribution yield of 4.00% and a 200 bps spread and net asset value. Risk: There are a number of risk to Brookfield Infrastructure Partners LP's achievement of our Outperform rating and US$59.00 target price: increasing competitive environment for infrastructure assets; BAM dependency; interest rate movements; access to capital markets; regulatory; taxation; credit and counterparty risk; commodity prices; energy market dynamics; environmental legislation; foreign exchange; infestations and disease; weather; and, labour shortage/strikes. Target Price and Rating Valuation Methodology and Risks: (12 months) for Brookfield Renewable Partners (BEP_u.TO)
Brookfield Infrastructure Partners LP (BIP.N) 53 22 August 2016
Method: We utilize multiple valuation methodologies to obtain our Neutral rating and C$44.00 target price for Brookfield Renewable Energy Partners LP, all of which produce the C$44.00 target. Our target is derived primarily from a cash-on-cash yield valuation approach which equates to roughly a 5.26% yield. Our Neutral rating is based, in part, on a lower level of visibility associated with distribution growth and lower outright growth versus some peers. Moreover, we believe there are limited visible and predictable catalysts to support a re-rating of the stock at this time. Risk: There are a number of risks to Brookfield Renewable Energy Partners LP achievement of our Neutral rating and C$44 target price: hydrology; dependence on BAM and potential conflicts of interest; taxation; increasing competition; capital markets competition; commodity prices; interest rate movements; energy market dynamics; environmental rules; and foreign exchange. Moreover, one should never underestimate the power of the regulator in any regulated business. Target Price and Rating Valuation Methodology and Risks: (12 months) for Niska Gas Storage Partners, LLC (NKA.N^G16) Method: We are setting a target price of $4/unit for NKA and in our view, NKA will continue to trade at a slight discount to the $4.225/unit transaction value and risks to our rating upgrade include – timing of transaction closure due to longer than expected time horizon and the receipt of regulatory approvals. Expected total return of ~30% lies near the median for our coverage, supporting our neutral rating. Risk: Risks to our $4 price target and neutral rating for NKA are delays in obtaining regulatory approvals for the Brookfield acquisition needed from the California Public Utilities Commission and Canadian regulators. Broader risks to the NKA fundamantals include - a less volatile natural gas price environment which would lead to less upside from optimization, competition from gas storage companies, major integrated energy companies, pipeline operators and natural gas marketers, whose storage expansion plans may put pressure on NKA's margins, execution risk on capital projects, and potential interest rate increases, which would negatively impact interest expense at the partnership's revolving credit facility as well as negatively impact the value of storage as it would increase carrying costs. On the upside, we have assumed a continued weak storage fundamental (i.e. narrow summer-winter spread) scenario as seen from the forward Nat gas curves. An unexpected uptick in price volatility will help NKA earnings and it may be able to de-lever and resume distribution payouts faster than we expect. A saving grace for speculative-oriented investors is that NKA has a very supportive sponsor in Carlyle/Riverstone, who we believe would be supportive should NKA find appropriate organic or acquisition opportunities that could help offset NKA's current challenges Target Price and Rating Valuation Methodology and Risks: (12 months) for Petrobras (PBR.N) Method: Target price methodology: Our US$2.00/ADR target price is based on PBR's historical 1yr fwd EV/EBITDA multiple of 5.76x and our own estimate of EBITDA in 2016 of $20.8bn if a 10% price hike were to materialize in 2016. Our UNDERPERFORM rating is based on downside at our target price and further analysis based on detailed DCF, SOTP, NAV and dividends support all of which suggest further downside. Risk: Risks to our US$2.00/ADR target price and UNDERPERFORM rating for Petrobras include, but are not restricted to, (1) Brent prices increasing beyond $75/bbl, (2) material BRL appreciation, (3) reduction in interest rates, (4) decrease in country risk perception, (5) major increase in domestic prices despite above parity, (6) non-dilutive capital raise, (7) opex and capex cuts significantly above the levels anticipated and (8) potential spin-off of parts of the business. Risks are exacerbated by compressed equity value relative to the company's EV, which means news flow may lead to significant changes in share price.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (BIP.N, BAM.N, BEP_u.TO, PBR.N, FTS.TO, CU.TO, ENF.TO, H.TO, ENB.TO, PPL.TO, EMA.TO, TRP.TO, KEY.TO, CPX.TO, CCRO3.SA, QUB.AX, NG.L, TRPL4.SA, TRN.MI, TCL.AX, MQA.AX, JSMR.JK, POT.NZ, NSC.N, CP.N, UNP.N, CSX.OQ, RWEG.F, FUM1V.HE, SSE.L, CEZP.PR, EONGn.DE, VERB.VI, GAS.MC, EDP.LS, ENEI.MI, BWP.N, SEP.N, NSH.N, ETP.N, HEP.N, ETE.N, MMP.N, PAA.N, NS.N, KMI.N, EIT.MI, SBAC.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (BIP.N, BAM.N, BEP_u.TO, ENF.TO, H.TO, ENB.TO, PPL.TO, EMA.TO, TRP.TO, KEY.TO, NG.L, TRPL4.SA, TRN.MI, MQA.AX, JSMR.JK, POT.NZ, CP.N, UNP.N, CSX.OQ, RWEG.F, SSE.L, EONGn.DE, ENEI.MI, ETP.N, ETE.N, KMI.N, EIT.MI) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (FTS.TO, NSC.N) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (BAM.N, BEP_u.TO, ENF.TO, H.TO, ENB.TO, PPL.TO, EMA.TO, TRP.TO, KEY.TO, NG.L, CP.N, UNP.N, CSX.OQ, EONGn.DE, KMI.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (BIP.N, BAM.N, BEP_u.TO, ENF.TO, H.TO, ENB.TO, PPL.TO, EMA.TO, TRP.TO, KEY.TO, NG.L, TRPL4.SA, TRN.MI, MQA.AX, JSMR.JK, POT.NZ, CP.N, UNP.N, CSX.OQ, RWEG.F, SSE.L, EONGn.DE, ENEI.MI, ETP.N, ETE.N, KMI.N, EIT.MI) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (BIP.N, BAM.N, BEP_u.TO, PBR.N, NKA.N^G16, FTS.TO, CU.TO, ENF.TO, H.TO, GEI.TO, ENB.TO, PPL.TO, EMA.TO, TRP.TO, KEY.TO, CPX.TO, CCRO3.SA, QUB.AX, NG.L, TRPL4.SA, TRN.MI, TCL.AX, MQA.AX, JSMR.JK, POT.NZ, KSU.N, CP.N, UNP.N, GWR.N, CSX.OQ, RWEG.F, FUM1V.HE, SSE.L, CEZP.PR, EONGn.DE, VERB.VI, GAS.MC, EDP.LS, ENEI.MI, BWP.N, SEP.N, NSH.N, ETP.N, HEP.N, ETE.N, MMP.N, PAA.N, NS.N, KMI.N, EIT.MI, SBAC.OQ) within the next 3 months.
Brookfield Infrastructure Partners LP (BIP.N) 54 22 August 2016
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (FTS.TO, NSC.N) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (NSC.N, KSU.N, UNP.N, GWR.N, CSX.OQ, KMI.N, CCI.N, SBAC.OQ). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (TCL.AX, AZJ.AX, NS.N). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (ETE.N). Credit Suisse beneficially holds >0.5% short position of the total issued share capital of the subject company (NS.N). Credit Suisse has a material conflict of interest with the subject company (BIP.N) . Credit Suisse is advisor to Global Infrastructure Partners and Canada Pension Plan Investment Board in relation to the acquisition of an interest in the shares of Asciano Limited. Credit Suisse has a material conflict of interest with the subject company (PBR.N) . Andre Natal was formerly employed by Petroleo Brasileiro SA. within the past 12 months and received compensation from the company during that period. A household member of the research analyst Andre Natal is employed by Petroleo Brasileiro SA. Credit Suisse has a material conflict of interest with the subject company (QUB.AX) . Credit Suisse is advisor to Global Infrastructure Partners and Canada Pension Plan Investment Board in relation to the acquisition of an interest in the shares of Asciano Limited. Credit Suisse has a material conflict of interest with the subject company (TAEE11.SA) . Credit Suisse has a material conflict of interest with the subject company (TAEE11.SA). Credit Suisse is advising FIP Coliseu on the announced potential sale of its stake in Taesa. Credit Suisse has a material conflict of interest with the subject company (ETP.N) . Credit Suisse acted as exclusive financial advisor to ETP and SXL. Credit Suisse has a material conflict of interest with the subject company (ETE.N) . Credit Suisse is acting as financial advisor to Energy Transfer Equity (ETE) on its announced acquisition of The Williams Companies (WMB). For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. For a history of recommendations for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to https://rave.credit-suisse.com/disclosures/view/report?i=244628&v=2is0m4xtbwgxw8xsxgzkipgbu . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (SSE.L, PNN.L). The following disclosed European company/ies have estimates that comply with IFRS: (NG.L, TRN.MI, SVT.L, RWEG.F, SRG.MI, SSE.L, EONGn.DE, UU.L, PNN.L, GAS.MC, EDP.LS, IBE.MC, CNA.L, ENEI.MI). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (BAM.N, BEP_u.TO, ENF.TO, H.TO, ENB.TO, PPL.TO, EMA.TO, KEY.TO, NG.L, CP.N, UNP.N, EONGn.DE, KMI.N) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Credit Suisse has entered into a strategic partnership with First NZ Capital ("FNZC"). Pursuant to this agreement, (POT.NZ) is jointly covered by Credit Suisse and First NZ Capital. This research report is authored by: Credit Suisse Securities (Canada), Inc...... Andrew M. Kuske ; Paul Tan To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Canada), Inc...... Andrew M. Kuske ; Paul Tan For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.
Brookfield Infrastructure Partners LP (BIP.N) 55 22 August 2016
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Brookfield Infrastructure Partners LP (BIP.N) 56