Infrastructure is suddenly a hot investment in the US and Australia
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Infrastructure investment used to be the purview of pension funds, but over the last week it has been catching fire after the trillion-dollar infrastructure stimulus announced by the Biden administration in the US.
The announcement led to both retail and institutional bargain hunters scouring for underpriced US infrastructure stocks that could potentially benefit from the package.
That hype aside, the long term thesis around infrastructure investing hasn’t really changed, and still centres around long-term guaranteed yield return. This is because most infrastructure assets are tied to years or even decades-long contracts.
Traditionally, industries included in this category would be everything from tolls, water, and gas & electric utilities – but these days the list includes cloud services and data centre companies too.
Globally and also in Australia however, infrastructure stocks have recently been under pressure from the broad-based selling sparked by the pandemic.
As a result, M&A activities have increased as large pension and investment funds look for undervalued assets within the category around the world.
In Australia, Spark Infrastructure (ASX:SKI) is about to end its listing on the ASX after the company agreed to a 100% takeover by a consortium led by global private equity giant, KKR.
The offer was for $2.95 a share before franking credits, and valued Spark at around $5.2 billion. Spark’s share price rose by 1.8% on Monday to close at $2.82.
The consortium of buyers includes players such as the Ontario Teachers’ Pension Fund and fellow Canadian PSP Investments, which have their eyes fixed on Spark’s portfolio of assets.
This portfolio includes a 49% ownership in Victorian distribution operators Powercor and CitiPower.
Spark also owns a 49% stake in South Australia’s distribution network operator SA Power Networks, and a 15% stake in transmission network operator Transgrid in New South Wales.
According to a portfolio manager of Resolution Capital, Jan de Vos, the bid price seems to be fair value as it represents a 50% premium to the 2021 regulated and contracted asset base of Spark.
“Even though Spark is essentially a holding company which owns minority stakes in high quality electricity distribution and transmission assets, we believe those assets are attractive,” de Vos told Stockhead in an email.
“To have any chance of meeting Paris carbon reduction targets, the world needs to electrify and decarbonise electricity generation. Assets such as Spark should be in pole position to benefit from this trend,” he added.
The Spark deal is one of two major ASX infrastructure M&A deals currently in play, with the other being that of Sydney Airport (ASX:SYD).
Last week, SYD rejected an upgraded takeover offer from Sydney Aviation Alliance for $8.45 a share which valued the company around $21bn, after rejecting the initial offer of $8.25.
The Sydney Aviation Alliance consortium is led by IFM, and comprises other players such as UniSuper, QSuper, and US-based Global Infrastructure Partners.
Apart from being the only publicly listed airport in Australia that handled 45 million passengers a year before COVID-19, Sydney Airport also owns 107-hectare of empty land that sits adjacent to the airport building.
The company has earlier said that it could potentially build freight logistics as well as entertainment facilities including a hotel on the empty plot.
Australian investors are spoilt for choice when it comes to investing in the infrastructure sector.
Here is a list of 10 infrastructure stocks currently listed on the ASX.
|Code||Company||Price||1-year return||Market cap|
|SKI||Spark Infrastructure||$2.82||+28%||$4.97 bn|
|SYD||Sydney Airport||$7.48||+41%||$20.7 bn|
|TCL||Transurban Group||$14.08||+2.6%||$38.5 bn|
|QUB||QUBE Holdings||$3.02||+3.25%||$5.75 bn|
|APA||APA Group||$10.06||-9.0%||$11.9 bn|
|ORG||Origin Energy||$4.26||-20%||$7.5 bn|
Ausnet Services (ASX:AST) owns and operates Victoria’s electrical transmission network, and distributes electricity to individual homes.
An interesting fact about Ausnet’s share register is that it’s predominantly held by foreign companies, with Singapore Power and State Grid of China topping the register list.
Transurban Group (ASX:TCL) is all about toll roads, operating a total of 21 toll roads in Australia in North America.
The company’s assets include the Eastern Distributor in Sydney, CityLink in Melbourne and a number of express lanes in the greater Washington area in the US.
Transurban saw its average daily traffic decrease as a result of COVID-19 in FY21, which prompted global ratings company S&P to downgrade its outlook on TCL from “stable” to “negative”.
Aurizon (ASX:AZJ) owns and operates trains and railroads. Their rail network is predominantly in NSW, Queensland and WA.
The company provides freight services and transports bulk industrial materials such as coals, minerals, and agricultural products.
Just like Aurizon, QUBE Holdings (ASX:QUB) is a logistics company that provides bulk storage, warehousing, and transport services.
In July, the company announced that it will sell its Moorebank Logistics Park asset for $1.67bn, a facility that includes warehouses and freehold land.
QUBE says the sale was necessary as it plans to develop a number of warehouses elsewhere.
APA Group (ASX:APA) owns gas pipelines and transmissions across Australia, except for Tasmania.
The company distributes LNG that is not destined for exports to Asia, throughout Australia.
Near-term tailwind for the company includes a recent study from EnergyQuest showing that gas prices in the east coast market will continue to increase, as demand from Asia increases due to hot weather.
Meanwhile, NextDC (ASX:NXT) is a Brisbane-based company that owns data centres and provides cloud services.
The company recently said that it has plans to expand its M3 data centre in Melbourne, after buying the adjacent 40,000 sqm of empty land.
The total land that NXT owns is now 100,000 sqm, on which it says it will build a ‘hyperscale campus’ with a data centre of around 150MW of capacity.