Page 10 - DIY Investor Magazine | Issue 40

A HEAD SCRATCHER
April 2024 10
DIY Investor Magazine ·
BBGI’s high yield looks secure but the trust continues to trade at a wide discount...by David Kimberley
A widening of discounts across the infrastructure sector over the past two years can leave you with the impression that rate hikes have impacted – or are likely to impact – all trusts equally. The reality is that some are much less susceptible to the risks higher rates create than others.
BBGI Global Infrastructure (BBGI) is a prime example of this. The trust has a globally diversified portfolio of availability-style assets, with government or government-backed counterparties and inflation-linked contracts. All of the trust’s holdings are in AA/AAA-rated investment grade economies.
The result of this set up is that BBGI’s investments produce highly predictable cash flows from reliable public sector counterparties, regardless of economic cycles or market volatility. The pandemic provided a great example of the strength of this model as the trust continued to generate its usual cash flows, despite the global economy grinding to a halt.
From these secure, predictable cash flows, BBGI has been able to deliver annual increases to dividend payouts, and BBGI has met or exceeded all its dividend targets since its IPO in 2011. Indeed, the trust is targeting an annualised increase to dividends of 6% for 2024, following a 6% dividend increase for 2023, these are sector leading dividend increases.
These are likely to be fully covered as BBGI aims to have dividend coverage of 1.3x over the long-term.
‘BBGI HAS MET OR EXCEEDED ALL ITS DIVIDEND TARGETS SINCE ITS IPO IN 2011’
The inflation-linkage in the trust’s contracts also means that it has been more immune from the impact that rising prices have had elsewhere over the last two years. The inflation-linkage in BBGI’s contracts is index-linked and works in a mechanical way, with mark ups to contracts made and passed directly on to clients, in some instances on a monthly basis.
BBGI also mirrors these contracts with the management companies it pays to ensure the trust’s holdings remain fit for use. This limits the degree to which there can end up being a mismatch between revenue the portfolio generates and the amount that must be paid to these contractors.
‘ILLUSTRATES THE TRUST’S ABILITY TO GROW ORGANICALLY AND THE FACT IT DOES NOT NEED TO GO AND RAISE FUNDS FROM THE MARKET’
What this has meant in practice over the past two years is that BBGI has seen an increase in revenues, as it has been able to mark up contracts with its counterparties to reflect higher rates of inflation.
At the same time, equivalent agreements with the trust’s contractors mean that costs have been kept under control and not increased to the detriment of the trust’s earnings.
Secure, increasing revenue is important but it has arguably been fears around debt that have prompted reratings in the broader investment companies market.
‘BBGI’S INVESTMENTS PRODUCE HIGHLY PREDICTABLE CASH
However, here too BBGI’s managers have structured the trust to FLOWS FROM RELIABLE PUBLIC SECTOR COUNTERPARTIES’
shield it from the impact that higher rates could have.