Infrastructure’s advantages outlined by First State’s Peter Meany
Global-listed infrastructure has continued to outperform global equities, driven by investors seeking low-risk business models that are relatively immune to a rapidly worsening global economic outlook.
Strong cashflow generation, combined with share prices trading below intrinsic value is leading to higher levels of share buyback activity in the asset class. We forecast that buybacks will average about 6% of shares on issue in the next three years.
This will provide a 1% return of cash to our fund’s unit holders over three years, on top of a forecasted 2012 dividend yield of 4.7%. If the developed world slides back into recession, earnings from infrastructure assets will remain robust (as they did in 2009) as a result of regulated returns, essential services, pricing power, contracted revenues and low operating costs.
We believe European infrastructure stocks have been oversold. As share prices have fallen, we are seeing increased insider buying from management, both directly and in the form of share buybacks.
M&A activity has been prominent since the end of the global financial crisis, supported by ongoing low interest rates, improved corporate confidence and attractive valuations. Infrastructure assets are increasingly sought due to their inflation-hedging characteristics; many have an explicit link to inflation because of regulation, concession agreements or contracts.
The toll road sector provides an explicit link to inflation. In France, for example, concession agreements provide annual toll increases at a minimum of CPI x 70% for motorways. Similar inflation-linked concessions exist in Australia, Canada, Brazil, Italy, Portugal, Spain, the UK and the US.
The trend of pension funds purchasing infrastructure assets is becoming more noteworthy. In recent months, several infrastructure companies have received takeover offers considerably above market prices. For investors in listed infrastructure, these higher levels of M&A activity are cause for cheer. Indeed, so far this year, four companies in our portfolios have received bids at substantial premiums: Central Vermont Public Service, ConnectEast, Northumbrian Water and Forth Ports.
In common with all asset classes, investment in infrastructure is not without risks. Political interference continues to be the largest threat to the sector, with governments announcing further austerity measures to shore up balance sheets.
However, inflation protection and structural growth should underpin earnings growth for global listed infrastructure in a difficult global economic environment. In our view, the asset class is well placed to deliver attractive risk-adjusted returns through strong capital growth and inflation-protected income.
Peter Meany is manager of the First State Global Listed Infrastructure fund