ASX-listed infrastructure and utilities stocks are struggling to fund their dividends off free cashflow alone, and investors are better off in lesser-known overseas names such as Italy’s listed air traffic controller, ENAV, if they want desirable infrastructure exposure.
Ursula Tonkin, the Canberra-based portfolio manager for infrastructure boutique Whitehelm Capital, says current valuations are only “slightly more expensive than long term averages”, relative to history, “but not very much so”.
Ursula Tonkin Alex Ellinghausen
“If you look at these sectors relative to where interest rates are, they are still cheap.”
However, quality and defensiveness matter more. “Some of the Australian stocks aren’t fully covering their distributions with free cashflow,” Ms Tonkin said, and that, coupled with valuation, means Whitehelm does not own anything in Australia right now.
She also thinks the US is an expensive hunting ground: “A good example of that is the communication towers companies, there are some large US communications towers businesses and we just can’t reconcile the valuation with the cashflow profile.”
A general softening in passenger growth expectations has caused European transport infrastructure assets to sell-off. That being so, the fund manager likes ENAV, which last month reported first-half revenue growth of 1.5 per cent to €417.3 million ($670 million) and earnings growth of 3.2 per cent to €115 million. The Milan-listed group forecast 2020 dividend per share growth of 4 per cent and has advanced 21 per cent this year.
Whitehelm is picky about what it is willing to own. “We stick very much to the core infrastructure universe, very much the defensive end. We really like the regulated utilities like electricity grids and the long-term contracted assets like airports.
“We’re not stretching the definition to data centres, telcos or power generation.”
Over the long-term, it is drawdown protection that supports higher returns, she said, necessitating an emphasis on minimising risk.
As for the macro, turning points in interest rate cycles will impact the sector, particularly the regulated utilities or bond proxies. “In the short-term that can be true, however what we find is if you look out beyond that out to three, years, five years, the fundamentals reassert.”
Ms Tonkin made the shrewd decision in the early 2000s to take over coverage of infrastructure and utilities, instead of the consumer discretionary sector which she was also offered. “I chose infrastructure and utilities because I didn’t want to be pigeon-holed as a female analyst into retail and healthcare. I’m really glad I did.”
Article written by Vesna Poljack, The Australian Financial Review’s Markets Editor. Sep 10, 2019 – 10:51am