Value Investing

Infrastructure India Fund – Small, Risky But Good Upside Potential

Article by Deep Value Investments Blog ~ by Rob Mahan  @DeepValueInv

Just put a very small position (1.4% portfolio) in Infrastructure India Fund at 3p.

It has come up on my screens a few times but is now too cheap to ignore.  This is highly risky stuff but has very good upside – if it all plays out.  I can see a multiple of the current share price in a year or two.

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Infrastructure India Fund
myeviajes / Pixabay

This is breaking one of my investment rules – it is 75.40% owned by GGIC IIP Holdings limited.  Something I usually avoid – they are Guggenheim Investment Partners – a very large US asset manager.  As far as I have been able to find there are no minority shareholder protections in place.  Guggenheim can delist the company at will – as they own over 75%.  Odd thing about this is that it was sold at IPO with assets from Guggenheim, then bought more from Guggenheim with a placement taking their stake back up to the current 75%.

Guggenheim also control company debt that needs refinancing – albeit only a small amount of debt.  $25m vs a NAV of  $237m.  This again provides a back-door route to seizing the 25% of the company they don’t own.

I actually don’t think this will happen – as an asset management company Guggenheim need outside capital – it won’t do to simply steal from minorities, particularly for at most $70m.  They could simply offer $50m – double the current share price, buy out the minorities and do it nicely.  Guggenheim partners have $290bn AUM so this is small change to them and not worth the reputational hit.  Institutional investors like them like to rob you slowly – via excessive fees mostly….

I have googled intensively and found no instances where Guggenheim have screwed over minorities before – I am not ruling it out.  They have received a lot of bad press of late – something I think means being screwed here is much less likely.

https://www.ft.com/content/bfe346d2-be73-11e7-9836-b25f8adaa111

Being just one example…

Performance has been terrible – NAV has fallen from £373m in 2015 to £282m now.

Fees are excessive – £5m a year plus shares to manage a series of companies that should be able to manage themselved – this is c1.8% of the NAV.  Management are former Guggenheim partners – parachuted in here.  There is lots not to like here.

The assets are pretty very hard to analyse.  As a plus when they sold a toll road in 2016 it was only at a 16% discount to NAV.  Auditors are KPMG – provides some reassurance…

http://otp.investis.com/clients/uk/infrastructure-india-plc/rns/regulatory-story.aspx?cid=433&newsid=697401

Assets are as follows:

SMH  – 400MW Hydropower – 31% stake  – NAV £10m – My value £0 but option value.

This has £343m debt and is incomplete, miracles can happen and this might not be worthless – but my strong bet is that this is worth 0.

IEL – 41MW Wind  – 100% stake – Nav £10.6m – My value £10.6m

Project has £11m debt.  I would be willing to bet this could be sold reasonably easily – but it doesnt make a dent in running costs so largely immaterial.

IHDC – 62MW Hydro + 30MW under construction – 50% stake Nav £29m – My value £29m

Project has £8.9m debt, again I would imagine this is easy to sell, slightly more material.

DLI – 37.4% valuation £246.4, project debt £85.7.  Container / transport/ shipping.  Valuation comes from NPV calculation.  Apparently the terminals are ‘close’ to completion but need more investment.  Disclosure is poor as to exactly how much or when they will be completed / what they will earn.  Valuation is falling – presumably they are paying debt on work in progress but not making progress due to lack of funds.

At a company level they have £29.5m of debt vs a NAV of £237.5m or £0.35 per share.  This is a tenth of the current share price.  Given the valuation of their underlying assets I would hope there is scope for the trust to (for example, sell)their £49.6 (ish) of good assets to do something with the £246m assets.

There is ongoing bridging funding in place – and a loan is being discussed.  Negotiations are said to be ‘advanced’. http://otp.investis.com/clients/uk/infrastructure-india-plc/rns/regulatory-story.aspx?cid=433&newsid=952957

I suspect if sustainable financing is announced the share price will rise significantly – hopefully rising more when projects are successfully completed.  Ultimately Indian infrastructure is a decent place to invest – over the last 5 years most have a CAGR of 15-20%.  This has fallen from about 65p to 3p – or about -50% every year….

This is high risk – I dont trust management, I dont trust the major shareholder / bond holder – but I think their somewhat ghetto reputation puts them on a leash.  This is so cheap I am prepared to have a very small punt, with the hope of a rapid / strong return.  This is something of an experiment for me – I have observed bombed out things turning round, often when they hit a tenth of NAV on a number of occassions so I am going to try investing in them in very small size.

As ever comments, positive or negative are appreciated…