Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest.
As readers will be well aware, sometimes even the most reliable, well-run company can fall out of favour. How you react to that as an investor will depend on your mindset. Questor sees an investment trust trading at an unusually wide discount to net asset value (Nav) and wonders whether there is a bargain to be had – 3i Infrastructure might fit that description.
The trust was launched in 2007 and, adjusting for a hefty special dividend in 2018, the Nav and the dividend have made fairly steady positive progress ever since. The average annual Nav total return over the past 10 years is just shy of 14pc and the dividend has risen from 7p to 12.65p over that period.
Thanks in part to that track record the shares have tended to trade at a substantial – perhaps excessive – premium to Nav for most of the company’s life. However, that changed in September 2022 and today the discount to Nav is around 15pc. The net effect of this change in the rating is that the share price has made little to no headway over the past three years.
Infrastructure ought to be a relatively safe investment – these are assets that provide essential services over the long term and reasonably predictable income. However, that does not mean they are risk-free.
Unfortunately, that combination of asset-backing and predictable income makes them easy to load up with debt, sometimes excessively – as we have seen with the UK water companies. There are also risks at the planning and construction phase, as we have seen with HS2. However, for a good investment manager, these are risks that can be navigated successfully.
3i Infrastructure’s earliest investments included a stake in Anglian Water and some in private finance initiative (PFI) projects such as schools and hospitals. However, the first big win for the portfolio came from a £151m investment made in 2011 in Eversholt, a train leasing company that the trust acquired and then grew.
This deal typified the trust’s focus on core infrastructure businesses that could deliver a combination of capital growth and income, rather than just a predictable income stream. It is this that differentiates 3i Infrastructure from most other listed infrastructure trusts, which tend to offer higher dividend yields but lower overall total returns.
Eversholt was sold in 2015, crystallising a 3.4x return on the investment. By then it owned 28pc of the UK passenger train fleet, predominantly weighted towards electric trains. Anglian Water was sold in 2017, having been successfully shepherded through a regulatory review. It generated a 3.3x return on 3i Infrastructure’s investment. In the meantime, in 2014, the experience gained with Eversholt had given 3i Infrastructure the confidence to finance a new fleet of trains for the Thameslink franchise – that was sold in 2019, earning the trust a 5.9x return.
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