3i Infrastructure (LSE:3IN) shares were trading close to net asset value in early November, as investors assessed the effect of the TCR disposal on a portfolio that has also moved into data centres.

The discount was only about 1.75%, an unusually narrow gap in a listed infrastructure sector where some peers trade at considerably wider discounts.

The latest annual results covered the year to 31 March and showed a total return of 8.5%, in line with the company's medium-term target range of between 8% and 10%. Net asset value per share rose to 405.2p from 379.9p, and net Assets reached £3.7bn.

About the company

3i Infrastructure is a listed Investment company that holds controlling and significant minority stakes in infrastructure businesses, mainly in Europe and North America. It is managed by an adviser from the wider 3i group and aims to deliver a blend of income and Capital growth to shareholders. Its holdings span energy transition, digital infrastructure, transport and essential services, and include operators such as Tampnet, which provides offshore communications, ESVAGT, a maritime services provider, and Infinis, a renewable energy business.

The company earns returns in two ways. Portfolio businesses generate dividends and interest that support the Shareholder dividend, while changes in the valuation of each asset, driven by earnings, contract terms and the discount rate applied, feed into net asset value. Disposals then crystallise those valuations, which is why the TCR sale carried so much weight in the reported total return.

Financially, the latest year delivered a total return of 8.5%, within the 8% to 10% medium-term target range, with net asset value per share at 405.2p and net assets of £3.7bn. The Dividend of 13.45p was covered by net income. Strategy has been tilting towards digital infrastructure, as the Lefdal commitment illustrates, while disposal proceeds are being used to repay borrowings and restore Balance Sheet flexibility.

TCR and Lefdal

The defining transaction was the sale of TCR, the largest exit in the company's history. At an Enterprise value of about €2.7bn, proceeds to 3i Infrastructure (LSE:3IN) were around €1.1bn, or £994m, which management put at an estimated 50% above the valuation at the start of the year. Management cited an internal rate of return of about 20% a year and a blended money multiple of 3.6 times.

The proceeds were to be used to repay the revolving Credit Facility in full, and management described the balance sheet as transformed, with no major refinancing needed in the next three financial years. The company (LSE:3IN) indicated pro forma net cash of about £200m once pending deals had completed.

The company also committed about €300m to Lefdal Mine Datacenter in Norway, which has 80MW of fully contracted capacity. An application to increase capacity to 200MW has been submitted, although that expansion has not been included in the base case. Other investment included bolt-on acquisitions for ESVAGT, Joulz and Future Biogas.

Mixed picture across holdings

Not all of the portfolio has performed to plan. DNS:NET, a German fibre business, was written down to zero after lenders withdrew Debt funding amid stress in the sector. SRL fell behind expectations and has a new chief executive and finance director, while REMOS saw slower adoption than expected and Ionisos lagged slightly despite Revenue growth of 7%.

Among the firmer assets, Tampnet exceeded its revenue and Earnings targets, Infinis had a solid year, Oystercatcher posted record revenues and a 23% return, and FLAG performed well on Demand for subsea fibre. Bernardo Sanchez Incera, an investment director, said that prospects were more skewed to the upside, citing the portfolio mix and the Lefdal investment.

How infrastructure investment companies work

Infrastructure companies of this kind own assets such as networks, energy facilities and service businesses that often earn revenue under long contracts or regulated frameworks. Many of those revenues are linked to inflation, which is one reason the sector is followed by investors seeking steady income.

Because the underlying holdings are unlisted, their values are set through discounted Cash Flow models rather than market prices. The discount rate is therefore central. When government bond yields rise, the rate applied to future cash flows can follow, which lowers valuations, and that link explains the attention paid to the share price relative to net asset value.

The company also reports its weighted average discount rate, which gives readers a way to compare the return embedded in its valuations with prevailing market rates and with other listed infrastructure vehicles.

What to watch next

Several threads will shape the next set of results. Investors are likely to look at how quickly the data centre investment at Lefdal is built out, whether the capacity application is approved, and how the portfolio uses the cash freed by the TCR sale.

The holdings that fell short, including the German fibre Business written down to zero, remain a reminder that individual assets can move against the portfolio. The handover of the chair in January and any change in discount rates applied at the half-year will also be part of the picture.

Rising bond yields remain the broad sector risk, while the pace at which pending transactions complete will determine how quickly the net cash position of about £200m is reached.

Dividend path and chair succession

The dividend for the year to March was 13.45p, fully covered by net income, and the board has set a target of 14.3p for the current year, an increase of 6.3%. The final payment of 6.725p went ex-dividend on 11 June and was paid on 10 July.

Richard Laing is to be succeeded as chair by Andrew Sykes, who became chair designate in July and takes the role in January.

Rising bond yields present a challenge to infrastructure valuations in general, although the company's weighted average discount rate of 11.1% at the March year end provides a measure of the return embedded in its valuations. Interim results from the FTSE 250 constituent will provide the next detailed view of how the portfolio is progressing.