Infrastructure mispricing creates opportunities

15 April 2020

The overall impact of the COVID-19 on the listed infrastructure sector has seen some parts of these sector negatively affected but, at the same time, it has generated mispricings across the asset class and created buying opportunities, according to First Sentier Investors.

Both mobile towers, which saw unprecedented demand for network capacity as internet usage soared, as well as electric, gas and water utilities continued to provide essential services to their communities through this crisis.

“While usage is down, earnings are driven by regulated return on capital investments, making these companies the most recession-proof businesses in the asset class,” Andrew Greenup, First Sentier Investors’ deputy head of global listed infrastructure (GLI) said.

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Following this, the sector saw unprecedented declines in airport, toll road and passenger railway volumes as even consumption of essential services like electricity and natural gas was reduced, hitting energy infrastructure.

“Oil and gas pipelines and storage are under pressure from both demand and supply problems in global energy markets, leading to lower prices, lower customer creditworthiness and higher risk of standard assets,” Greenup said.

“Freight railways are the most economically sensitive sector of global listed infrastructure asset class. Not surprisingly, it is going to experience large volume declines in the next quarter as the global economy grinds to a halt.” 

On a positive note, the manager said it expected companies to weather the storm as most of them demonstrated robust balance sheets to get through this 2020 revenue hole, even with transport infrastructure facing an ugly lockdown period as the long-dated assets with robust business models were expected survive this once-in-a lifetime event.

According to Greenup, the sector was experiencing mispricing, especially in the energy infrastructure, toll road and airport sectors, which presented buying opportunities.

“Toll roads look to be aggressively oversold given the one-off nature of COVID-19 lockdowns, so we have been cautiously adding to positions in Vinci, Eiffage and Transurban.

“Listed infrastructure firms are trading at very low earnings multiples despite interest rates being low to negative around the world. 

“I do get worried about Governments and central banks printing money, but I sleep well at night knowing they can’t just make more real assets like our Zurich’s airport, FL electric grid, like the expressway connecting Shanghai to Nanjing or Birmingham’s water pipes,” he said.

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