Since forming in 2009, Brookfield Infrastructure Partners (BIP 2.61%) has grown its funds from operations by a 19% compound annual growth rate. That growth fueled 12% compound annual growth in the company's distributions to investors. However, as good as its past has been, the company's best days appear to be ahead. Three factors drive that view: recently completed acquisitions, organic growth projects underway, and ample acquisition opportunities on the horizon.
Let's make a deal
Last year Brookfield Infrastructure Partners completed $2 billion of acquisitions to build out its energy, transportation, and utilities platforms. These deals included increasing its stake in a natural gas transmission business in North America and its Brazilian toll roads, buying toll roads in Peru and India, purchasing an interest in an Australian ports business, and acquiring a natural gas storage business in North America. These acquisitions have gotten the company off to a good start in 2017, fueling double-digit earnings growth in the first quarter.
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The company has continued making deals this year, including investing $1.3 billion for a stake in a natural gas transmission business from Brazilian oil giant Petrobras (PBR 1.44%) and making a small deal for a water business in Peru. The Petrobras deal is notable for its size, and because the company sees it driving "meaningful growth in our financial results for the balance of the year." It should be a steady contributor since long-term, fixed-price contracts back the system and should provide stable cash flow. Furthermore, the asset has upside because these agreements enable the company to capture inflationary increases. The capital could in turn be invested in expanding the pipeline network, allowing Brookfield to take advantage of growing gas demand in Brazil.
The building boom
Organic growth opportunities abound in Brookfield's portfolio. Even after completing $850 million of growth projects last year, the company has $2.3 billion of capital projects remaining in its backlog, most of which are in its utilities and transportation segments.
Many of these growth projects are in Brazil, which is a result of the company's decision to take advantage of the country's recent economic and political turmoil to capture several compelling opportunities. For example, Brookfield won a 30-year concession to operate and expand a toll road that connects with its existing network. The company will pay $215 million up front and invest another $90 million over the next few years in expanding and upgrading the road. In addition, the company plans to spend $300 million to develop greenfield electric transmission lines in the country after winning several long-term concessions. It expects to put these lines into service over the next five years and will earn stable cash flows from them for 30 years.
These organic growth initiatives, when combined with inflation-linked price increases and volume upside resulting from GDP growth, position the company to grow its funds from operations by 6% to 9% annually over the next several years.
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Refilling the acquisition pipeline
In addition to the visible near-term growth from recent acquisitions and organic growth projects underway, Brookfield Infrastructure Partners has at least one more acquisition in the pipeline. Earlier this year the company announced that it would invest up to $200 million in acquiring a portfolio of telecom towers in India. These towers will expand the company's communication infrastructure platform, which currently consists of towers in France. In addition, the company is evaluating several other tower acquisitions; it has reportedly made a $1 billion bid for additional tower assets in India.
Brokfield has several other opportunities. In India, where the government recently launched plans to privatize more than 70 road assets, Brookfield could expand its toll road portfolio in the country. The company also recently set up shop in Mexico, in hopes of snagging value-based investment opportunities, similar to those it found in Brazil, that might arise due to growing protectionism north of the border. Finally, the company is monitoring corporate carve-out opportunities in the North American energy space for potential deals similar to its Petrobras transaction, where it acquired a premier asset with stable cash flow at a value price.
While the company traditionally spends $500 million to $1 billion on acquisitions each year, it has already locked up more than $1.5 billion of transactions this year. And given the size of its opportunity set, the company could invest well in excess of the typical upper limit of this range over the next couple of years, putting it in the position to extend its track record of delivering double-digit earnings and distribution growth.
Investor takeaway
Brookfield Infrastructure Partners expects 2017 to be another record year thanks to a combination of recently completed growth projects and acquisitions. Meanwhile, the company has the largest capital project backlog in its history, as well as a robust pipeline of acquisition opportunities. Those factors lead management to believe that Brookfield can continue growing at a brisk pace for the next few years.
