Cash in on the Thames ‘super sewer’ fund that’s on a 24pc discount

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Recent news around the potential acquisition of two London-listed infrastructure investment companies, BBGI Global Infrastructure (BBGI) and Harmony Energy Income Trust (HEIT), has shone a fresh light on the opportunities currently available across the sector. Add to that the growing interest from outside parties seeking to acquire high-quality assets where a mispricing exists between public and private markets.

International Public Partnerships (INPP) is one such company where we see attractive value on offer as a result of a discount between public and private market valuations.

INPP was the second London-listed core-infrastructure fund to launch, back in November 2006 under the name Babcock & Brown Public Partnerships (BBPP), before renaming in 2009. The company has grown significantly from the £300m raised when it floated on the stock market to today’s market value of around £2.1bn.

The strategy is global and diversified by subsector, but with a bias towards the UK and assets with regulated revenues. It is managed by specialist infrastructure investment manager Amber Fund Management.

Investing in infrastructure assets offers several key benefits, particularly in an environment of higher inflation. The underlying revenues generated by infrastructure assets are typically predictable, supported by long-term contracts with quality – often public – counterparties.

Additionally, infrastructure investments often come with inflation-linked returns, providing a hedge against rising prices, and supporting progressive dividend growth. A natural consequence of the above characteristics, alongside the often critical role that these infrastructure assets can play in society and the economy, results in a relatively low risk profile.

Indeed, the Government is publishing its 10-year infrastructure strategy alongside a multi-year spending review in June, which could help to reduce uncertainty for investors in social, economic, and housing infrastructure.

As at the end of December, the INPP portfolio had 20pc in transport, 19pc in energy transmission (notably offshore transmission owner assets that connect offshore wind farms to the mainland), 16pc in education, 16pc in gas distribution (notably a stake in Cadent), 15pc in wastewater infrastructure (notably Tideway – the super-sewer running underneath London), and 14pc across other assets.

By geography, the fund is 73pc invested in UK, 14pc in Europe, 10pc in Australia/New Zealand and 4pc in North America. Additionally, 85pc of the portfolio was operational and 15pc was in the construction stage.

Turning to where the fund’s income comes from, 50pc of the portfolio is exposed to regulated assets, 38pc in public private partnerships, and 12pc in operating businesses.

The trust follows a progressive dividend policy, and has successfully delivered this promise across the 17 financial periods since it launched in 2006, with an attractive dividend compound annual growth rate of 2.8pc. In 2024 the dividend was covered 1.1 times by earnings, and is targeting dividend growth of 2.5pc in each of 2025 and 2026 (dividend targets of 8.58p and 8.70p respectively).

The dividends are well supported by the existing portfolio, where the company can point to being able to sustain its existing progressive dividend policy for at least the next 20 years without making any new investments.

However, like many other listed infrastructure investment companies, INPP’s share price has suffered over the past three years, while interest rate movements have been volatile. The company recently published its full-year results for 2024, showcasing the portfolio’s continued robust fundamental performance and highlighting the significant progress in capital recycling, deleveraging, and returning capital to shareholders.

In the 18 months to the end of December, INPP raised £260m from asset sales, at valuations in line with the assets’ latest carrying values, which has supported the company’s valuation process and facilitated the full repayment of its short-term debt facility. It is paving the way for an active share buyback programme.

Indeed, in the company’s recent results, the board announced a material upgrade to the programme of returning capital to shareholders (principally via share buybacks) from £60m to £200m.

The board also flagged the next asset sale could take place soon – suggesting the share price should potentially improve. These measures demonstrate a strong commitment from the board to providing liquidity and addressing the persistent discount the trust trades at.

Additionally, there are changes taking place at the board level that should simplify the corporate governance structure at the next AGM. The management fee is being amended from 1 July to be based on an equal weight of market value and net asset value (previous charged on gross asset value), which at the currently depressed share price level, should deliver material cost savings to investors, while also increasing alignment between manager and shareholders further.

The balance sheet is conservative, with the company’s corporate debt facility remaining undrawn as at the end of 2024, with cash of around £77m.

The recent bid for INPP’s close peer BBGI Global Infrastructure (BBGI) has resulted in BBGI trading very close to its end of December NAV. INPP, meanwhile, continues to languish on a discount of around 24pc despite having a core portfolio comprised of similar assets.

We believe that INPP’s share price and resulting discount is materially undervaluing the investments within the portfolio, especially where INPP has exposure to high-profile assets (such as the Tideway super sewer) that could be highly attractive to external parties.

INPP meets our key criteria for a core pick within infrastructure investment companies.

It has a low-risk portfolio with compelling total return potential as well as fully covered and growing dividends. We estimate INPP offers a long-term internal return of rates at this share price of around 10.7pc and a dividend yield of 7.6pc.

Additionally, we take comfort in the board’s actions and messaging that shareholder concerns and the persistent share price discount are being taken seriously – and we look forward to the company making further progress on the well-signposted strategic initiatives over the coming months.

Questor says: buy
Ticker: INPP
Share price: TBC

Markuz Jaffe is an analyst at Peel Hunt

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