For airport, power network and toll road stocks the outlook is 'patchy'

The outlook for toll roads, airports, gas pipelines and electricity networks is likely to be patchy until a COVID-19 vaccine is found, which at the very earliest could be in mid-2021.

Energy networks such as Spark Infrastructure (ASX:SKI) are “highly resilient” and toll roads such as Transurban (ASX:TCL) should see traffic volumes return to normal soon, say Morningstar analysts Adrian Atkins and Adam Fleck.

“Airports face a difficult near-term future, with passenger numbers down more than 97 per cent and recovery likely to be hampered by ongoing border closures, a hesitant public, and general economic weakness,” they said in a note today.

“Companies with net debt/EBITDA covenants are at greater risk of a breach, all else being equal. Interest coverage covenants typically have much greater headroom but even these could be at risk if the crisis drags on.

“Auckland Airport (ASX:AIA) and Atlas Arteria (ASX:ALX) have raised equity, Sydney Airport (ASX:SYD) may later in the year.”

Green is good for utilities

Stimulus that is directed towards renewable energy and “green” hydrogen would give utilities such as Spark a solid footing for growth, says RBC Capital Markets analyst James Nevin.

However, he does not hold out hope the federal government will consider this an option, given the way gas has dominated the discussion in the National COVID-19 Coordination Commission (NCCC).

“We haven’t seen a focus of Australian stimulus spending being targeted particularly towards a “green” recovery at this stage. We think if this was to emerge, it is more likely to appear at a state level rather than a federal level,” he said today.

He says power generator Infigen Energy (ASX:IFN), Spark and fellow network operator Ausnet Services (ASX:AST) would benefit, as would APA Group’s (ASX:APA) gas-distribution networks if hydrogen extends the useful life of its pipelines.

Spark is the Morningstar analysts’ pick, but Nevin slapped an ‘underperform’ tag on it two weeks ago after the Australian Energy Regulator, which determines how much it’s allowed to spend and make in a year from its networks, set the financials for key asset SA Power Networks.

“We have an Underperform recommendation on SKI due to the headwinds it is facing on lower allowed rates of return, lower interest rates, the escalating cash tax paying position, and our resulting expectation of lower distributions from FY21,” he said.

Airports… ouch

Talk of travel bubbles has given airport stocks a slight lift, but analysts do not expect much good news this year. What they do believe however is that in the long term we will return to being heavy travellers.

Sydney Airport could rebound strongly in 2021 on the back of improving domestic travel, say the Morningstar analysts, but EBITDA (earnings before interest, tax, depreciation and amortisation) in 2020 is expected to fall by 54 per cent this year to $613m.

Auckland Airport isn’t so lucky, being as it is at the end of the line for most international travellers and an endpoint rather than a connection for most domestic flights.

“We anticipate passenger movements will remain near zero until at least July,” Atkins and Fleck say.

“But there is room for optimism.

“A proposed trans-Tasman bubble for international movements should support a gradual sequential improvement.”

They assume operations return to 2019 levels in 2022.

“We believe the trend of rising international tourism remains intact.”

Taking their toll

Fear of public transport may shift those who can’t work from home into their cars, as it has done in China, which would be good news for toll road owners.

Atkin and Fleck believe the locally-listed toll road operators Transurban and Atlas Arteria are likely to see a bounce from their Australia, US and Europe assets.

“Our base cases for these firms assume traffic volumes in 2021 are a few per cent below 2019, consistent with the recent Chinese experience. However, traffic could be higher than we currently forecast in the near term, depending on the strength of the economic recovery and the swing away from public transport,” they said.

The APRR tollway in France is Atlas’ key asset, while the Citylink in Melbourne is Transurban’s. Both own roads in the US as well.

Australian traffic volumes slumped by 40-50 per cent at the peak of the crisis while the APRR’s was down 80 per cent. This is because where the Citylink is an arterial road in a major city which benefits from necessary travel, toll roads in France tend to be long distance inter-city motorways, which were hurt by the economic lockdowns.

However, there is a case to be made for less traffic, and more working from home.

“This trend was already in motion as technology improvements have removed most obstacles for many workers, but COVID-19 could act as a catalyst to change perceptions permanently and make working from home more widely accepted,” they said.