AI Expansion And Strategic Acquisitions Set To Power Future Earnings Growth

Key Takeaways

• Expansion in AI infrastructure and strategic acquisitions, like data centers and logistics stakes, are set to boost revenue through diversified assets.
  
• Capitalizing on debt markets and engaging in capital recycling activities aim to improve net margins and provide liquidity for high-return investments.
  
• Reliance on capital recycling and interest-bearing activities, sector-specific risks, financial vulnerabilities from foreign exchange and interest costs, and the execution risks from strategic focuses could impact net margins and overall revenue growth.

Catalysts

Owns and operates utilities, transport, midstream, and data businesses in North and South America, Europe, and the Asia Pacific.

• Expansion and focus on AI infrastructure, including large-scale AI data centers, power, and transmission facilities, will boost revenue by tapping into the growing demand for AI capability, particularly impacting the Utilities and Natural Gas sectors due to power and storage requirements.
  
• Strategic acquisitions like the 40 data center sites and a 10% additional stake in a Brazilian integrated rail and port logistics business highlight growth through targeted investments, aiming to enhance revenue through diversified and expanding asset portfolios.
  
• Capitalizing on very attractive debt capital markets for asset-level balance sheet derisking through rightsizing, maturity extensions, and opportunistic repricing should improve net margins by reducing financing costs and extending debt maturities, thus enhancing financial stability and operational flexibility.
  
• Engaging in significant capital recycling activities, with processes underway expected to generate substantial proceeds, will provide liquidity to fund future high-return investments, impacting earnings positively by reallocating capital towards more lucrative opportunities.
  
• Leverage on global mega trends such as digitalization and decarbonization, particularly the exponential growth in global data center platforms necessitated by AI adoption, will drive future growth. The strategic positioning towards these trends is expected to significantly impact revenue and earnings as the company captures leading roles in emerging infrastructure demands.

Assumptions

• Analysts are assuming Brookfield Infrastructure Partners's revenue will decrease by -0.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.3% today to 4.8% in 3 years time.
• Analysts expect earnings to reach $920.1 million (and earnings per share of $3.46) by about September 2027, up from $-57.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.4x on those 2027 earnings, up from -251.7x today. This future PE is greater than the current PE for the US Integrated Utilities industry at 19.2x.
• Analysts expect the number of shares outstanding to grow by 0.54% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The sale of their interest in an Australian regulated utility business and additional interest costs from financing at their Brazilian gas transmission business indicate reliance on capital recycling and interest-bearing activities that could affect net margins due to varying interest rates and the unpredictability of asset sale proceeds.
  
• High contribution from acquisitions and organic growth within specific segments, like the transport and data segments, suggests potential risk if these sectors face downturns or if future acquisitions do not perform as expected, impacting overall revenue growth.
  
• The increase in interest costs and the impact of foreign exchange present financial risks that can affect net earnings negatively, especially if currency and interest rate fluctuations are adverse.
  
• The strategic focus on large investments in AI infrastructure and data centers entails significant upfront capital expenditure and execution risks, which could delay the anticipated positive impacts on cash flow and earnings.
  
• Dependence on achieving large-scale M&A activity in the second half of 2024, as mentioned, presents a risk if the expected deal flow does not materialize or if acquisition costs outweigh the benefits, potentially impacting earnings and slowing down expected growth.

Valuation

• The analysts have a consensus price target of $38.27 for Brookfield Infrastructure Partners based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $49.0, and the most bearish reporting a price target of just $34.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $19.2 billion, earnings will come to $920.1 million, and it would be trading on a PE ratio of 23.4x, assuming you use a discount rate of 5.8%.
• Given the current share price of $31.08, the analyst's price target of $38.27 is 18.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.