As global central banks embark on yet another round of rate cuts, taking the world closer to or beyond the zero-yield point, investors face a difficult conundrum. Stay in bonds that offer little to no yield with zero upside or growth; or invest in equities where uncertainties are far greater. Thankfully, there is an alternative. Listed infrastructure can offer high visibility on future cashflows, stable and predictable growth, and modest dividend yields.
In the final part of our series on global listed infrastructure, our four contributors each share an idea (or two) from their portfolio that exemplifies the opportunities on offer in this underappreciated asset class.
Response come from Tim Humphreys, Ausbil; Andrew Greenup, Colonial First State Global Asset Management; Warryn Robertson, Lazard Asset Management; and Ben McVicar, Magellan Asset Management.
A quality US utility with an attractive valuation
While Nova Scotia is famous for its natural environment, lobsters and tidal bore rafting, few people know it is also home to a hidden gem of a utility, Emera. Ausbil recently initiated a new position in Emera (EMA:CN), a Canadian listed and regulated electricity and gas utility with operations mostly in Nova Scotia-Canada, but also in Florida and New Mexico. We are invested in Emera given an attractive combination of quality momentum and valuation upside.
Generally speaking, the US utility sector is experiencing strong growth and relatively attractive returns compared to other developed markets. The challenge is finding an attractively valued investment. In Emera we believe we believe we have found just that.
We see many positive attributes in Emera. These include:
- A strong and visible growth profile of 6% CAGR to 2021 in its rate base, mostly from gas-fired and solar investments in its Florida operations (growing at ~9% CAGR), but also Emera’s investment in new transmission lines in Canada. We see upside potential in EMA’s growth profile from this investment, supporting the case that essential infrastructure offers growth to investors as well as income.
- Florida is an attractive state in which to invest with relatively high allowed regulated returns, a stable regulatory environment, energy demand growth, combined with solid economic and population growth.
- Further improvements are coming in the Emera business with financial leverage expected to reduce, and overall quality improve, with the divestment of merchant generation assets and more recently, the announced sale of its Maine regulated utility assets at an attractive valuation.
The global leader in renewable energy
NextEra Energy (NEE:US) is a Florida based electric utility, and world’s largest renewables owner. For context, NEE produced 47-terawatt hours (TWh) of renewable energy in 2018. In comparison, the whole of Australia produced 28TWh of energy from renewable sources over the same period.
This high-quality company has a strong management team and a high growth utility service territory with a constructive regulatory environment, as well as being the US’ largest wind and solar owner. The declining cost of wind, solar and battery storage gives NEE significant value upside optionality, as the expanding renewables industry disrupts the conventional coal and nuclear (and eventually natural gas fired) electricity generation industries over the next decade.
With battery storage close to being – or already - economically competitive, the ability to store intermittent electricity generation from renewable sources will only accelerate the virtuous circle of declining costs and expanding market share of renewables. As the US industry leader in this space, NEE has a large competitive advantage. The company is forecast to deliver earnings growth per share of between 6% and 8% per annum over the next 3 to 5 years, with a dividend yield of between 2.5% and 3.0%, and is well placed to benefit from future advances in renewable energy.
Data as at October 2018.
An anomaly in markets creates a mispricing opportunity
Our position in Italian infrastructure companies is unique when compared with indices and other managers and we think it is an attractive investment proposition today.
We hold two Italian regulated utilities, Snam and Terna, which we believe are being mis-priced at current valuations. The market became concerned that the regulator was not going to respect the agreements that exist between the Government and the companies. The issue essentially is that Italian regulated asset returns are mandated against Italian government bonds, not European government bonds or German issued Euro Bunds.
There is of course a spread between these bonds and allowed returns are higher if you use the Italian government bond. Many in the market, believe that the regulator will revert to the lower European bond rate. If this were true, this would indeed reduce allowed returns. But this has not been the case and we believe it will not be, as it follows the letter of the contracts in place and there is a long historical precedent that Italian bonds are the basis for allowed returns.
A $10B pipeline of investment opportunities
Ben McVicar, Magellan Asset Management Limited
While many infrastructure companies benefit from long-term structural growth, Atmos Energy is a particularly good example of the long-term opportunities available in infrastructure. Atmos Energy, with its key operations in Texas, is a US-regulated utility that develops and runs gas transmission, distribution and storage assets. As a regulated utility, Atmos can charge customers a fair price to cover the cost of operating its business, including a return on the capital it spends to build and maintain the network.
Due to the age of the network and the need to improve safety standards, many of Atmos Energy’s pipelines are up for replacement, which means the company needs to invest significant capital over a long time horizon. In fact, the company has disclosed it has 27,000 miles of pipelines to replace. At the end of the current business plan (which entails Atmos Energy investing US$9 billion to US$10 billion), the company will have replaced about 800 to 1,000 miles of pipelines a year. At this rate, we expect the Atmos investment and replacement program to last decades.
For long-term investors, this is a highly visible and reliable growth path that we can sit on for an extended period.
Putting it all together
While infrastructure may not offer the allure and triple-digit growth of stocks like Afterpay and Appen, what it does offer is an effective alternative to traditional equities and bonds, and a markedly different risk profile to either.
- In part one of this series, our contributors shared their top reasons for investing in global listed infrastructure.
In part two of this series, our contributors busted some popular myths about global listed infrastructure.
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