A monthly review and outlook of the Global Listed Infrastructure sector.
Market Review - as at April 2018
Global Listed Infrastructure gained in April, supported by robust earnings growth and a healthy economic backdrop.
The best performing infrastructure sector was Satellites (+14%), reflecting relief that earnings guidance was not subject to further cuts. Airports (+5%) outperformed on robust volume growth for Asian and LatAm operators; while Railroads (+5%) climbed on strong operational performance from North American freight rail companies. The worst performing infrastructure sector was Towers (-5%), which fell after US telecom operators Sprint and T-Mobile (both significant tower customers) resurrected their merger plans.
Every region ended the month in positive territory, led by Japan (+9%) which rallied as North Korean geopolitical tensions eased. Europe ex UK (+6%) rose as healthy economic data was reflected in favourable earnings numbers from its transport infrastructure stocks. The worst performing region, North America (+1%), was held back by underperformance from its large-cap Tower stocks, but still delivered positive absolute returns.
The Fund ended the month +4.0% higher1, 107 basis points ahead of the FTSE Global Core Infrastructure 50/50 TR Index (SGD).
Asset Allocation (%) 1
Top 10 holdings (%)1
The best performing stock in the portfolio was Osaka Gas, whose full year earnings beat market consensus. Concerns about increased competition, following the recent deregulation of local gas markets, are beginning to give way to renewed investor appreciation of the company’s cash generation and under-levered balance sheet. Japan Airport Terminal, which manages facilities and retail sales at Tokyo’s Haneda airport, continued to benefit from structural growth in Chinese overseas tourism. Passenger rail operators Central Japan Railway and East Japan Railway gained as business and leisure demand underpinned continued steady passenger growth on their high quality bullet train (shinkansen) services during the March quarter.
US east coast freight rail operator CSX announced better than expected March quarter earnings, helped by a disciplined approach to cost control. Earnings from peer Norfolk Southern, which services the same regions as CSX, also beat consensus as a result of very strong pricing, productivity improvements and higher volumes. The company also raised its share buyback program. These positive developments suggest that both companies are being spurred to lift their performance by the Precision Scheduled Railroading strategy being implemented by CSX’s new management team.
Most utilities shrugged off rising bond yields and gained during the month. US-listed gas utility UGI rallied ahead of its second quarter earnings result on growing market recognition of its earnings growth potential and strong financial metrics. Normalised (cooler) weather conditions proved supportive of its utility and midstream business segments. Alliant Energy received approval from the Iowa Utilities Board to build a further 500 megawatts (MW) of wind-powered generation capacity, in addition to an already-approved 500MW. The approval adds certainty to Alliant’s forecast rate base growth of between 5% and 7% pa. PG&E regained ground as work to fix the regulatory uncertainty surrounding Californian utilities’ wildfire liabilities continued. The main exception to this upward trend for utilities, and the worst performing stock in the portfolio this month, was Hong Kong-listed Power Assets Holdings, which gave up ground after paying out a HK$6 per share special dividend.
Tower stocks Crown Castle and American Tower fell on concerns that their revenue growth rates may be curtailed by the proposed merger between Sprint and T-Mobile, as overlapping tower sites are decommissioned. The new combined company is forecast to require ~85,000 sites, compared to the ~109,000 used across both wireless operators today. The deal still requires regulatory approval, and could face opposition from consumer groups concerned about reduced competition.
Pipelines delivered mixed returns. Canada’s Enbridge Inc received approval to replace Line 3, a mature pipeline connecting Alberta oil sands to US refineries, but was denied permission to revise its route. The requirement to maintain the existing route – which makes it a more challenging project – is the latest reminder of the regulatory headwinds faced by the sector. More positively, Plains All American Pipeline rallied as robust Permian Basin volume growth highlighted the value of its strategically located West Texas-focused pipeline networks and storage assets. Kinder Morgan also outperformed as March quarter earnings came in ahead of consensus, helped by a strong result from its substantial gas pipelines division. As expected, the company raised its 2018 dividend by 60%, taking its yield to ~5%.
During April the Fund sold pipeline operator Enterprise Products Partners after significant outperformance compared to its peers reduced mispricing. Holdings in Dutch-listed energy storage company Vopak were sold after strong earnings and positive guidance saw the share price rally, and we became concerned about increasing competition at its core Rotterdam operations. Spanish toll road Abertis was also sold as the Atlantia / ACS takeover saga drew close to a resolution.
1 Source: Lipper & First State Investments. Single pricing basis with net income reinvested. Data as at 30 April 2018. Fund since inception date: 3 March 2008. *Inception - 31 May 2008: S&P Global Infrastructure Index. 1 June 2008 – 31 March 2015: UBS Global Infrastructure and Utilities 50-50 Index. From 1 April 2015: FTSE Global Core Infrastructure 50/50 Index.
Market Outlook and Fund Positioning
The Fund invests in a range of global listed infrastructure assets including toll roads, airports, ports, railroads, utilities, pipelines and mobile towers. These sectors share common characteristics, like barriers to entry and pricing power, which can provide investors with inflation-protected income and strong capital growth over the medium-term.
Two key risks for Global Listed Infrastructure investors – (i) a sharp rise in interest rates, and (ii) political and regulatory interference – came to the forefront of investors’ minds during the first quarter of 2018. After the resulting pullback, our outlook for the asset class is now more positive. Valuation multiples are at or below historic averages, and continue to be supported by growing earnings and sustainable dividends.
There are encouraging signs that management teams are moving to address market concerns - reduced leverage, non-core asset sales, more capital discipline, a focus on improved governance and customer satisfaction. We believe that these improved fundamentals will be increasingly recognised over the coming year.
Although recent volatility has been unsettling, we remain confident that essential volumes, inflation-linked pricing and strong cash flows will benefit infrastructure investors over the medium and long term. Importantly, we also see significant mispricing within sectors which should reward active management.
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