Global infrastructure stocks have been languishing this year with the benchmark Morningstar Global Equity Infrastructure index only moving sideways since the start of the year. Yet this sector remains undervalued, argues Andrew Maple-Brown, lead manager of the four-star silver-rated $1.1 billion Renaissance Global Infrastructure Cl F. He maintains that the sector has a considerable upside potential and may soon reward investors.
“One of the reasons we invest in the sector is for its more defensive nature. The assets are less economically sensitive and less economically cyclical. For that reason, the sector is more defensive,” says Andrew Maple-Brown, co-founder and managing director at Sydney, Australia-based Maple-Brown Abbott Global Listed Infrastructure, the Toronto-based sub-advisor to CIBC Asset Management Inc., which markets the fund. In 2012, Maple-Brown Abbott Ltd., which was founded 40 years ago by his father Robert and Chris Abbott, started the listed infrastructure strategy with Andrew and his co-founders. “It does not get the same boost when the economy is stronger, as you will see in more cyclical sectors. For this reason, when markets run strongly, as they generally have over the last 12 months, the sector often lags.” Maple-Brown was interviewed on a flying visit to Toronto in late April.
Year-to-date (April 29), Renaissance Global Infrastructure Cl F has returned 6.33%, versus 7.06% for the Global Infrastructure Equity category. On a longer-term basis, however, the fund has proven to be either a first or second-quartile performer. Over three and five years, it returned an annualized 9.16% and 6.13%. In contrast, the category returned an annualized 7.14% and 5.11%, respectively.
At the same time, adds Maple-Brown, high interest rates are providing competition for the sector and hurting infrastructure stocks that are normally viewed as yield-paying investments. “We believe that valuations look very attractive and we’re seeing some of the strongest upside in our valuations,” says Maple-Brown, a 29-year industry veteran who oversees about US$2.9 billion in assets. “In terms of interest-rate sensitivity, a lot of the assets have a natural inflation linkage. To the extent that interest rates stay high, because inflation is high, a lot of our assets have an offset in terms of their revenues being linked to inflation. This explains why the sector did well in 2022. Markets were generally weak, but the infrastructure sector performed very well. Stocks were weak because interest rates were increasing and so were inflation expectations. A lot of our companies had stronger revenues as a result of higher inflation. They were able to pass the increases through the tariffs paid by the end-users. If interest rates stay high because the economy is stronger, that is when the sector is less able to offset those higher interest rates.”
As for valuations, Maple-Brown likes to compare publicly listed assets to private infrastructure funds. “We believe that the listed markets are trading considerably cheaper than the private funds. Based on our calculations, over the past five years, private assets traded at a 35% premium relative to equivalent assets in public markets. The valuations are also cheap relative to global equities. The multiple compared to global equities is the cheapest it’s been over the last 10 years. Our valuations are showing very healthy upsides.”
Taken together, specialist global listed infrastructure managers oversee about US$160 billion in assets. But the opportunity set, as it’s called, is about US$2.5 trillion. So, specialist investors who own listed stocks account for only about 6% of the opportunity set. This means that prices for infrastructure assets in the publicly listed markets are largely set by generalist investors.
Does the flat performance of the sector signal a buying opportunity? The answer is a firm ‘yes,’ says Maple-Brown. “People have understandably looked to the higher-beta sectors over the last 12 or so months. The sector has been unloved. But it certainly looks attractive at this point.”
As for the other side of the coin, Maple-Brown admits that so-called regulatory risk is a worry. “About half of what we invest in is regulated utilities, or water, gas, and electricity businesses. About one-quarter is in transportation concessions, for toll roads, airports, and railway tracks. The last quarter is in long-term contracts, for renewable assets, pipelines, or telecommunication towers. Our biggest two exposures are regulatory risk and political risk.”
The regulator’s job is to balance the interests of the utility owners and their customers. “Understanding how the regulatory construct operates—some are national, such as in the U.K., and others are state-based, as in the U.S. is critical. We study how commissioners are appointed or elected, as well as the history of the regulator.” As an investor, Maple-Brown argues it’s important to earn a fair and timely return on assets and not subject to so-called regulatory lag. Second, he has to determine to what extent he can grow the investment in an asset.
“We want to ensure that we invest in jurisdictions that don’t surprise us,” says Maple-Brown, “That they will continue to provide a fair, and stable, return on our investment, and continue to allow for further investment, which is affordable for customers and will ensure the ongoing integrity and reliability of the network.”
Essentially a bottom-up value investor, Maple-Brown argues that his firm regards infrastructure stocks as part of an overall strategic asset allocation. “We believe these assets have differentiated characteristics. For us, it’s all about low cash flow volatility and the natural inflation hedge. Our companies have the strongest combination of those two characteristics,” observes Maple-Brown, “That’s why these companies behave differently from the broader category of equities. We focus on those two attributes throughout the investment process and look for companies that are defensive and have a natural inflation linkage.”
Corporate governance and attractive valuations are also important. “These are very long-dated assets, so it’s critical that capital allocation decisions are being made with shareholders’ returns in mind. We want a management team that is aligned with investors,” he says. Furthermore, the team is looking to invest in assets that are natural monopolies or duopolies. “That’s what gives them their stable predictable cash flows, which is why they behave differently from broader equities,” says Maple-Brown.
From a sector viewpoint, about 51% of the portfolio is held in utilities, 16% in communication towers, 9% in toll roads, 5% in airports, 5% in rail tracks, and 4% in pipelines. These weightings are not too dissimilar from the benchmark FTSE Infrastructure Index. From a geographic perspective, about 47% of the portfolio is invested in the U.S., 14% in the U.K., 10% in Spain and 9% in the Netherlands. The fund has a running yield of about 4%, before fees.
One of the top holdings in a concentrated 28-name portfolio is Getlink SE (GET), formerly known as Groupe Eurotunnel, the Paris-based owner and operator of the “Chunnel” that links the U.K. and France. “This is a very long-dated investment and has over 60 years remaining on that concession. They don’t operate the passenger trains that run through the tunnel—that’s handled by Eurostar, a separate company—but every Eurostar passenger pays a portion of their ticket price to the Chunnel. Getlink also operates a service where cars and trucks can be transported through the tunnel and also has an electricity transmission cable that passes through the tunnel and makes money depending on the differences in prices between the U.K. and French electricity market.”
The managers note that there is plenty of spare capacity in the infrastructure. “There is also an inflation linkage on the portion that Eurostar ticket holders have to pay,” says Maple-Brown, adding that the stock has been in the portfolio for about 10 years.
Before the COVID pandemic and the Brexit referendum, the stock was trading at about 17 times earnings before interest, taxes, depreciation and amortization (EBITDA). “We think the earnings are depressed and there are still impacts from COVID and Brexit. There are reasons why earnings will normalize over the coming years,” says Maple-Brown, adding that a normalization of traffic will occur once a seafarers wage bill takes effect and will make ferries less competitive. “The multiple has dropped to about 14 times EBITDA. So from a valuation perspective, it’s attractively priced.” This means the stock is trading about 15% below its long-term multiple and on currently depressed earnings.
Another top pick is Ameren Corp. (AEE), an American power company created through the 1997 merger of Union Electric Co. and Central Illinois Public Service Co. Maple-Brown argues that the company will be a beneficiary of the energy transition occurring in North America. “We are strong believers in the continued electrification throughout the world across multiple sectors, including electric vehicles as they increase their penetration. We are also seeing strong load growth in other applications such as data centres and in the oil and gas and chemicals industries,” says Maple-Brown, adding that decarbonization will see coal-fed generators replaced by cleaner fuels such as renewable energy sources.
“You have increased electricity demand, caused largely by data centres that consume a lot of electricity. There is also a big investment need in switching the generating capacity, from coal to cleaner sources,” observes Maple-Brown. “But importantly, it has to be affordable. The reason for that is those costs will be spread over a larger load and more electricity will be sold.”
Ameren operates in Illinois and Missouri and has a large transmission network, which is federally regulated. “The transmission investment will be particularly important in facilitating the growth in renewables,” says Maple-Brown, adding that the firm owns wind and solar energy facilities in the Mid-West. “We expect that their asset base will increase by about 50% over the coming five years. That will lead to an earnings growth rate of 6-8%. So, for a boring, defensive company, that is earning an approximate 4% dividend yield and with a very reliable 6-8% earnings growth rate, which is driven by the investment required in the transmission and distribution network and generation assets, we think that makes an attractive investment opportunity.”
Ameren currently trades at 15 times forward earnings. Meanwhile, Maple-Brown concedes the stock has been de-rated and used to fetch an 18 times forward earnings multiple. “The utility sector is perceived as being interest rate-sensitive, so the valuations have come down significantly.”
Looking ahead, Maple-Brown notes that if global equity markets continue to be strong, then infrastructure will likely lag. “But infrastructure will be well-positioned when the economy starts to slow, and those other companies face headwinds to their growth. Our growth is more structural in nature. I am very confident that our companies will grow strongly, due to a very large global need in investment in infrastructure assets. What’s more, the valuations are attractive.”
