Macquarie Says InfraREIT Will Outperform On 'Simple' Story

In a report published Tuesday, Macquarie analyst Andrew Weisel initiated coverage of InfraREIT Inc (NYSE: HIFR) with an Outperform rating and a price target of $36.

InfraREIT expects to report 10 percent DPS growth per annum through FY18 from organic capex and another 5 percent from acquisitions from its parent company, Hunt Developer, or third parties.

"We conservatively project a 17% CAGR in cash available for distribution (CAFD), driving an 11% DPS CAGR after equity dilution, resulting from rate base growth that's among the fastest in the utility sector and sustainable beyond '18," analyst Andrew Weisel mentioned.

A potential acquisition of Oncor by Hunt could boost InfraREIT's growth significantly. "Though all eyes are on Oncor, we argue that Hunt development projects not yet on the ROFO list could take its place," Weisel added.

In the report Macquarie noted, "HIFR's current yield is notably below average at 2.9% vs regulated utilities at 4.0%, REITs at 4.2%, yield cos at 5.3%, and MLPs at 6.0%. Moreover, taxation is unfavorable for HIFR as a REIT: the after-tax yield is 1.6% vs 3.0% for utilities. On the flip side, this means a lower cost of equity, which supports growth from M&A."

Weisel expressed skepticism regarding the company's REIT structure being fully proven, even in Texas. "We believe that, after the next rate case, the PUCT may support a sharing mechanism between InfraREIT and ratepayers. Outside of TX is even dicier," the report added.