Brookfield Infrastructure Partners (BIP). BIP is a limited partnership (though its cash flows are not subject to the same tax treatment as MLPs, or Master Limited Partnerships).
Brookfield Infrastructure Partners (BIP) is a spin-off from a much larger mother ship, Brookfield Asset Management (BAM). While little BIP is small and scrappy at $316 million, mother BAM boasts a far larger market cap of $9.5 billion.
As a publicly traded partnership, 50% of BIP is owned by investors like you and me. Forty percent is owned by BAM, the parent, and the last 10% is owned by Brookfield directors and management.
BIP was spun off from the BAM mother ship with the intent of being a “pure infrastructure play.” The far larger BAM has all sorts of assets on its balance sheet; through the creation of a stand-alone entity, BIP offers a way to pick up direct infrastructure exposure.
BIP’s primary assets are electricity transmission lines and timber, and they are distributed across North and South America.
On the electricity side, BIP owns roughly 5,500 miles worth of transmission lines (power lines) in Chile and Canada (Northern Ontario). Additional power lines in Brazil were sold at a considerable profit in the third quarter of 2008.
BIP’s transmission lines are part of a regulated monopoly, which means no competitor can muscle in. As of March 2008, these assets had a recorded book value of $330 million –– more than the value of BIP’s current market cap. Using the Brazilian asset sale as a benchmark –– in which BIP fetched a 40% gain over book price –– its likely current holdings have a far, far higher value than the old numbers reflect.
Power lines are a great business. Just as you have to drive to work each day (unless you’re retired or work from home), the electricity has to move from the power plant to your house (or the office building, the factory and so on).
Here’s why you want to own power lines:
They require very little maintenance and upkeep, so most of the cash flow goes right into the owner’s pocket.
Because people and businesses are steady in their use of electricity, those cash flows are very stable.
As inflation rises, steady price increases can be pushed through as part of the contract.
Additionally, BIP will have the chance to build out its electricity transmission networks at attractive rates of return over time. The only thing better than a strong, stable, cash-flow-producing business is a business that can expand on the same great terms. As emerging markets resume their upward trends, electricity use will go up too... and this can only be good news for BIP.
An Infinite Resource
The other thing BIP owns is timber –– more than 1.2 million acres in Oregon, Washington state, and coastal British Columbia. The nice thing about timberland is that, when managed properly, it’s an infinite resource. Unlike metals or fossil fuels –– which eventually run out and leave a site in
decline –– trees can grow back.
As with electricity, BIP’s parent company (and 40% owner) offers four decades of experience owning and operating timberlands. This gives BIP an edge in key areas like harvest planning and managing the product mix.
BIP’s acreage is concentrated in premium timbers like Douglas fir and hemlock. In addition, the close proximity to the coast gives BIP an edge on the export side of the business.
Timberland tends to rise in value over time because, unlike the currency spit out of a printing press, they just aren’t making any more of it. Timber’s uses are many and varied for the global economy, and, like power lines, timber has the advantage of being a high-margin, low-upkeep business.
When prices are high, BIP can cut more timber. When prices are low, they can cut less (saving costs) and let the acreage value appreciate. The timber itself is a renewable resource, and BIP has the ability to book capital gains through the occasional sale of choice parcels for land redevelopment.
An Exceptional Value
Investors are coming back to their senses, snapping up assets that got insanely cheap. BIP’s parent could well be buying back shares too, figuring it’s crazy to leave them out on the market at such a tempting price.
Back in March of 2008, management gave an estimate of BIP’s book value (the value of the underlying transmission and timber assets) at $24 per share. I think that is not only a reasonable estimate; it is more than likely a conservative estimate. BIP could easily be worth $25 to $30 per share.
As we prepare for a central-bank-induced inflation deluge, stable, cash-flow producing infrastructure assets will only increase in value. Power lines and trees will never go out of style... and the stream of income collected from those assets will only keep ticking up year after year. Buy Brookfield Infrastructure Partners (BIP:NYSE) at $18 per share or better.
Justice Litle, Executive Editor,
Taipan's Safe Haven Investor