Midas: 3i Infrastructure's an India play with income

By Joanne Hart for The Mail on Sunday
Updated: 13:55 EDT, 30 January 2011

Inflation is rising, the economy is shrinking and Bank of England Governor Mervyn King says living standards have not fallen so fast since the Twenties.

Good prospects: The firm, headed by Peter Sedgwick, owns a broad mix of assets, including Anglian Water

Against such a background, every little extra helps and businesses that deliver a decent dividend yield can provide investors with a real boost to their annual income.

Infrastructure companies are designed to do just that. But 3i Infrastructure is supposed to offer a little more.

Spun out of quoted investment company 3i in 2007, 3i Infrastructure aims to give investors the steady dividend income of its peers and capital growth. In other words, it offers yield with added spice.

Most quoted infrastructure firms invest in large, projects here, on the Continent and in America. This one does all that, but it also has a 20% stake in specialist fund 3i India Infrastructure.

India's economy is one of the fastest-growing in the world, with an immense need for roads, buildings, ports, bridges and all the paraphernalia of modern life.

3i and 3i Infrastructure have each invested about £150m in the fund, which is managed by a team of 3i specialists. Other investors have also put in money and the fund is designed to help finance large projects across India. It benefits from the annual income the projects deliver and their increase in value.

Back in Britain, 3i Infrastructure owns assets such as Anglian Water, the Norfolk and Norwich University Hospital and a string of schools in the Highlands.

The group also has a 45% stake in Oiltanking, a leading oil, gas and chemicals storage group based in Germany with facilities in Holland, Malta and Singapore. It even owns a 17% share in a German-waste-to-energy plant, Thermal Conversion Compound, generating power from rubbish.

In the past, 3i Infrastructure has been criticised for keeping too much of its money in the bank instead of buying assets. Chaired by former Treasury mandarin Peter Sedgwick, the group started life as a quoted company with about £1bn of cash, and until last year it had invested only two-thirds of this. With bank rates at all-time lows, returns from cash are paltry and were reducing the overall income generated by the company.

But the business has been busy in recent months. In November it was part of a consortium that acquired leading rail company Eversholt, which owns 29% of all the trains running in Britain and leases them to train operators, such as Virgin Trains and FirstGroup.

It also bought into an Indian energy company, GVK Energy, spending nearly £200m on both purchases. Further transactions are expected this year and next as governments increasingly offload investment in roads, schools and hospitals on to the private sector and as banks, which were big investors in these assets, are forced to dispose of them to rebuild their balance sheets.

Investment in these large projects is a competitive field, but 3i Infrastructure benefits from its relationship with 3i, which has retained a 33% stake in the business and advises on all its investments. 3i has a large team of specialists and an international network of contacts, so it is a very useful ally.

Even though the relationship between the two is strong, however, 3i Infrastructure is independent and was created specifically to offer investors the chance to invest in a business dedicated to infrastructure.

Midas verdict: 3i Infrastructure shares are trading at 114.5p and the company is expected to pay a dividend of 5.9p for the year to March 2011, up from 5.5p last year.

The group's assets have also been rising in value and should continue to do so, particularly once the economic recovery materialises.

These shares are unlikely to rocket, but for investors in search of generous income coupled with a measure of capital growth, this stock is a good bet. Buy.