Infrastructure – investing for growth
Steven Kempler on how underinvestment in infrastructure affects global listed infrastructure as an asset class.
The significant, prolonged and chronic underinvestment in infrastructure on a global scale is a widely written story. But what do these claims mean for global listed infrastructure as an asset class?
In 2017, the OECD called for US$95 trillion to be spent on global infrastructure through 2030, equating to more than US$6 trillion annually. This was a significant step up from a prior year study by McKinsey that estimated $3.3 trillion spend annually was required to keep pace with projected global growth. Similar studies over the years have concluded annual spending requirements in the range of US$3-8 trillion per annum. Regardless of the exact figure, the requirements are tremendous.
Alongside this, we have seen an increased level of political rhetoric focused on the need for further investment in infrastructure. Politicians across both the developed and developing world have called for increased infrastructure spending. Such focus generally revolves around upgrading existing infrastructure networks and expanding the availability of new infrastructure for society. However, in this modern era, Governments are less financially willing to commit the resources needed despite the necessity and acknowledgement of the economic multiplier effect its development can have. This is due in part to the already high public debt but also more populist support for education, health and welfare. They also recognise there is additional value in leaving this to the private sector.
For traditional equities, ongoing capital expenditure ("capex") is often perceived negatively, being a drain on free cash flows to shareholders. However, for infrastructure equities, the reverse is often true. That is, capex is generally seen as a positive – the reinvestment of retained earnings and fresh capital into building out networks and extending existing concessions typically translates into longer duration free cash flows and earnings growth.
As noted, there is a lot of investing to be done and we can see some of the private sector’s infrastructure spend by looking at the more transparent listed markets. Across our investable universe of 112 infrastructure companies (a select percentage of a far wider overall universe), we see aggregate capex of approximately US$180 billion in 2018 alone, and estimate a similar level to be maintained in 2019 and beyond1. This capex is predominantly in existing assets, such as:
- water (e.g. Severn Trent);
- electricity (e.g. National Grid);
- roads (e.g. Transurban); and
- airports (e.g. Zurich Airport)
Looking specifically at the largest infrastructure companies globally as represented by the FTSE index2, we can see the materiality of this expenditure as a function of company size as well as the earnings growth expected to be generated over the subsequent years.
Figure 1 Forecast capex of the 10 largest listed infrastructure companies in the FTSE Global Core Infrastructure 50/50 Index. Enterprise Value is an investment term that represents that total capital value of a company – being market cap plus net debt outstanding.
These companies are all publically listed infrastructure equities – they are typically monopolies or in strong monopolistic positions in the economies in which they operate. Their growth is financed by a combination of retained earnings, new debt and fresh equity (selectively raised from shareholders in the listed market). The result of this investment can be seen in the below charts – we have taken the same 10 companies and compared their forecast capex in both 2018/2019 as a percentage of their enterprise values and market capitalisations, with their EBITDA/EPS growth in the subsequent years (2019/2020).
Figure 2 Forecast capex and subsequent year’s EBITDA/earnings growth; based on the averages in Figure 1.
Growing capex requirements aren’t always the result of underinvestment. Despite well-worn steps of Government privatisations unlocking private capital leading to growth spending, a significant amount of capex is actually driven by change, such as utilising new, cleaner energy resources (whether it be gas, wind, or solar) or through new technology (disruptive included). Indeed infrastructure is often at the leading edge for renewables and more efficient environmentally-friendly initiatives.
It is noteworthy that many of the above names are in the United States. Whilst the US infrastructure need is well documented as a chronic underinvestment story, much of the capex being undertaken in the listed infrastructure space is as much about growth as it is replacement:
- NextEra Energy is building out renewables infrastructure across the United States, displacing traditional coal and nuclear electricity generation
- Crown Castle, the owner/operator of a portfolio of more than 40,000 cell phone towers, is facilitating the build of new wireless spectrum and soon-to-go-live "5G" to meet the insatiable demand for wireless data
- Dominion Energy, an electric utility, transforming itself through growth initiatives in gas infrastructure including long haul pipelines and LNG liquefaction for the export of shale gas
With the enormous demand for new infrastructure across the globe, the private sector is hungry to do it. However, infrastructure’s venerable monopoly characteristics need to be balanced with its social license to operate. As much as modern infrastructure is valued by the public and politicians alike, prices are the ultimate factor. Given the usually direct link between spent capital and prices charged to users, what consumers are willing to stomach is often one of the key constraints to growth. The upshot is that so long as companies and regulators artificially limit their level of annual capital spending to keep prices at acceptable levels, then the long tail of growth for the sector should stick around for many more years to come.
We therefore see a long term thematic where there are numerous opportunities for infrastructure investors to harness this significant and necessary growth in infrastructure. Listed infrastructure equities offer a direct route to participate in this capex and with the potential to generate an attractive return over the longer term, if invested prudently, comprised of both income and capital gains.
About the Maple-Brown Abbott Global Listed Infrastructure Fund (UCITS)
|ISIN||IE00BYP0WH33 (Sterling); IE00BYP0WK61 (US Dollar); IE00BYP0WG26 (Euro)|
|Fund strategy||The Fund is an actively managed portfolio that invests in global listed infrastructure securities, with a focus on infrastructure assets that provide essential services that are typically regulated, contracted or operate under a concession. These infrastructure assets typically deliver lower volatility and stable cashflows, as well as higher inflation protection, compared with global equities.|
|Investment objective||The primary objective for the Fund is to outperform the benchmark over rolling 5 year periods.|
|Benchmark||OECD Total Inflation Index + 5.5%|
|Recommended minimum investment time period||5 years|
1Based on Bloomberg estimates, Maple-Brown Abbott calculations, sourced 14 May 2018.
2Top 10 constituents of the FTSE Global Core Infrastructure 50/50 Index, as at 30 April 2018 (Source: FTSE Russell). Based on Bloomberg consensus estimates, Maple-Brown Abbott calculations, sourced 14 May 2018.
Issued by Maple-Brown Abbott.
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