Australia | Jun 22 2006
By Greg Peel
Infrastructure funds have been unpopular in the market of late due to fears of inflation-driven rising bond rates. When bond rates rise, infra yields fall. The present conundrum is, however, that in a falling market where risk appetite has diminished, "defensive" stocks come into focus and infra funds fall into this category.
Should they now be bought? Or should they still be avoided? Some brokers are increasing their infra portfolio allocations and others are steering clear for now. However, that should not dismiss the value that an excited UBS sees in UK company Inexus.
Inexus is a "last mile" utility infrastructure owner. The "last mile" represents that section of household utility connection from your house to the street. Inexus connections are currently nearly all for gas, but the company is moving into electricity. UBS believes there are opportunities in water as well.
UBS suggests Inexus "appears to offer a powerful combination of low risk free cash flows coupled with a big opportunity to invest for returns above the cost of capital". Inexus is 80% owned by Challenger Infrastructure Fund (CIFCA).
EBITDA growth on a consolidated basis is likely to exceed 10% for at least five years driven by the 20% growth UBS expects from Inexus. Guided distribution is for 26c for FY07 representing a yield of 8.8%. As the yield is expected to be 85% tax-deferred, UBS believes the fund will be attractive relative to fixed income investments.
Inexus satisfies the CIF required criteria of revenue certainty (via monopoly or regulation), strong cash flow, long term investment, first class management and CIF board representation.
UBS estimates the CIFCA partly-paids are worth $1.90, which provides 60% upside from the current market price (closed yesterday at $1.21).
UBS has initiated coverage of CIFCA with a Buy 1 (low risk) recommendation.