- Alupar Investimento has high-quality operating cash-generative assets that are fully inflation protected
- It is benefiting from organic growth and improving cash returns
Charles Jillings, manager of Utilico Emerging Markets Trust (UEM), explains why he invests in Brazilian utility company Alupar Investimento (BR:ALUP11).
"In tempestuous times, infrastructure assets typically offer a relatively safe harbour and refuge from the volatility of economic cycles. Perhaps none more so than electricity transmission lines – heavily regulated natural monopolies that typically operate for decades with minimal downtime or overheads.
In the UK, many are familiar with National Grid (NG.) but as emerging markets specialists we see even more attractive opportunities in growing economies such as Brazil. Here, the need to expand the transmission grid has led the government to tender projects out to several operators, sometimes with very attractive returns. Alupar Investimento is one such company and Utilico Emerging Markets Trust's largest holding [accounting for 4.1 per cent of its assets at the end of September], which it first invested in almost 10 years ago.
Alupar has a $1.5bn (£1.31bn) market capitalisation and is a Brazilian holding company for energy assets predominantly in Brazil, with some smaller projects in Peru and Colombia. The business has concession rights to 30 transmission assets totalling 7,929km of electricity lines as well as 631 megawatts of renewable energy plants.
Over the past five years, Alupar has grown its network kilometres by almost 50 per cent – a massive undertaking for what was a relatively small company – with almost flawless execution of what are often challenging greenfield projects. Planning, licensing, land rights, procurement and the front-end loaded cost of construction pose material risks to returns. Some companies have failed to manage these risks, but Alupar Investimento has excelled. Not only has it typically delivered its projects ahead of time and below budget, its management team has time and again shown superb capital discipline, refusing to overbid for new projects – it is totally focused on shareholder returns.
Once operating, the quality of earnings stream that transmission assets offer is exceptional. The projects have 30-year regulated revenue contracts which are annually indexed to inflation. With minimal overheads, much of this uplift flows down to profits, resulting in a prodigious cash flow year in, year out.
For Alupar the evidence is in the numbers. The commissioning of new projects, combined with substantial inflation adjustments, has meant that in its financial year to December 2021 its revenues increased by 33.9 per cent and net profits by 66.1 per cent. In the first six months of this year, revenues grew 23.8 per cent and net profits 46.5 per cent, and Alupar has increased its dividends by 50 per cent. This is the raw, organic growth that well positioned and managed companies in emerging markets can offer.
Alupar's share price is up 53.5 per cent over the past five years but still only trades on a 12.1 times price/earnings ratio and and 7.3 per cent dividend yield. And we expect more to come."
