A monthly review and outlook of the Global Listed Infrastructure sector.
Market Review - as at July 2019
Global Listed Infrastructure gained in July. An environment of geopolitical uncertainty and deteriorating economic growth was countered by falling interest rates and decent company results.
The best performing infrastructure sector was Towers (+4%). The sector continues to benefit from structural growth in demand for mobile data, as evidenced by strong Q2 results. Changes to industry structure in the US and Europe (outlined below) should continue to support the growth outlook. Toll Roads (+3%) gained on the appeal of their stable volumes and contracted pricing in a low interest rate environment.
The best performing infrastructure region was Australia (+4%) as government bond yields reached all-time lows, stimulating demand for income generating assets like toll roads and airports. Japan (+2%) also performed well as investors searched for value in a relatively expensive global equity market.
The worst performing sector was Ports (-4%) on increasing trade and political tensions between the US and China. An escalation of tensions with Iran in the Strait of Hormuz, a key shipping channel, also impacted sentiment towards global trade. This negative driver was reflected in the performance of Asia ex Japan (-2%).
Lower commodity prices and ongoing project delays produced a muted growth outlook for Pipelines (-3%) and reflected in the performance of Canada (-2%). Enbridge (-7%, fund underweight) continued to be impacted by regulatory, political and permitting delays on its Line 3 Replacement and Line 5 pipelines. These issues highlight how challenging it has become to build new pipeline infrastructure, but also reinforce the value of existing assets in the ground.
The First State Global Infrastructure ended the month +0.64%1 higher, outperforming its benchmark index by 103bps. Positioning within the Toll Road and Tower sectors aided relative performance. Overweight exposure to the UK and Japan were also positive drivers.
The best performing stock in the portfolio was SBA Communications (+9%). The US-based tower company delivered a strong Q2 result, supported by 6% growth in site leasing revenue, and raised the full year outlook. SBAC also initiated its first dividend and will continue to return cash to shareholders via share buybacks. Tower peers American Tower (+4%) and Crown Castle (+2%) were also positive contributors. The merger of telecom operators Sprint and T-Mobile presented a potential headwind for the tower sector. The market welcomed the forced sale of customers and spectrum to DISH which should create an effective 4th operator and mitigate the risk of consolidation.
Toll roads delivered another positive month of performance. CCR (+9%) continues to participate in new growth projects and privatisations that will be needed to enable Brazil to meet its infrastructure needs. Transurban (+6%) rallied as the market was attracted to its growing dividend relative to low yields on Australian government bonds. The company also opened another section of its WestConnex project - the M4 Tunnels extend the M4 Motorway another 6km from Sydney’s west towards the city. Ferrovial (+5%) continued to be driven by its concessions business with strong results from toll roads in Toronto and Dallas. Despite challenging weather conditions, 407-ETR in Toronto increased EBITDA by 9% in the second quarter. The opening of a new section of road in Dallas resulted in EBITDA growth of 68% for Texas Managed Lanes. New lanes were also opened in Charlotte, NC during the period.
Gas utilities performed well including ENN Energy (+7%) in China and Tokyo Gas (+7%) and Osaka Gas (+7%) in Japan on continued strong demand from industrial and power generation customers. Falling wholesale gas costs should also support margins and profitability in the short-term.
US freight railroads delivered mixed performance in July. Union Pacific (+6%) beat market expectations for Q2 through strong pricing power and improved operating efficiency. The company reduced headcount by 8% in the quarter in response to a weaker volume environment and following the implementation of Precision Scheduled Railroading (PSR). In contrast, Norfolk Southern (-4%) disappointed the market. The company started to implement its version of PSR operations from July so we expect to see material cost improvements in the second half.
Asset Allocation (%) 2
Top 10 holdings (%) 2
The worst performing stock in the portfolio was Williams (-12%) as very low gas prices forced a number of north-east US gas producers to reduce their growth outlook. While upstream economics will impact “supply-push” customers, there should still be demand for gas pipeline capacity from downstream “demand-pull” customers, underwriting the 5-7% long-term EBITDA growth outlined by the company. Dominion (-4%) underperformed as the market anticipated further delays to the Atlantic Coast Pipeline project as it seeks environmental permits.
UGI (-4%) announced the acquisition of Columbia Midstream from TC Energy for a relatively full multiple of 13x EBITDA. Management believe the gas gathering systems will complement the company’s existing gas pipeline and storage assets, though markets remain sceptical on synergies and growth expectations. Cheniere (-5%) was impacted by market concerns that the US trade dispute with China and low LNG spot prices would reduce the company’s ability to sign long-term contracts at attractive rates. The company is expanding its LNG export projects at Sabine Pass and Corpus Christi from 6 to 9 trains.
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
1 The First State Global Infrastructure performance is based on the Singapore unit trust, net of fees, expressed in SGD terms.
2 Source: Lipper & First State Investments. Single pricing basis with net income reinvested. Data as at 31 July 2019. Allocation percentage is rounded to the nearest one decimal place and the total allocation percentage may not add up to 100%. The First State Global Infrastructure inception date: 3 March 2008.
Market Outlook and Portfolio Positioning
The Fund invests in a range of global listed infrastructure assets including toll roads, airports, ports, railroads, utilities, pipelines, and wireless 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.
The Fund is positioned with Toll Roads as its largest sector overweight. Transurban, Atlantia and Vinci have high barriers to entry, strong free cash flow and inflation linked pricing. We are attracted to their reasonable valuation multiples and well-supported dividend yields of between 3% and 6%. Growing urbanisation and worsening traffic congestion are likely to underpin long-term demand. EM peers operate high growth toll roads with well-established concession agreements, providing an essential service to some of the most densely populated regions in the world.
The Fund is also overweight energy Pipelines including TC Energy, Williams and Enterprise Products. These companies own assets connecting North American oil and gas fields with processing facilities and export terminals, positioning them to benefit from rising production levels and energy exports.
The Fund is underweight Multi/Electric Utilities. A number of high quality US names continue to trade at valuations that we find difficult to justify based on company fundamentals. The Fund has also maintained its underweight exposure to Airports, with exposure limited to leading European and Mexican operators. The airport sector faces medium term headwinds following a long period of above-average growth.
This document is prepared by First State Investments (Singapore) (“FSI”) (Co. Reg No. 196900420D.) whose views and opinions expressed or implied in the document are subject to change without notice. FSI accepts no liability whatsoever for any loss, whether direct or indirect, arising from any use of or reliance on this document. This document is published for general information and general circulation only and does not have any regard to the specific investment objectives, financial situation and particular needs of any specific person who may receive this document. Investors may wish to seek advice from a financial adviser and should read the Prospectus, available from First State Investments (Singapore) or any of our Distributors before deciding to subscribe for the Fund. In the event that the investor chooses not to seek advice from a financial adviser, he should consider carefully whether the Fund in question is suitable for him. Past performance of the Fund or the Manager, and any economic and market trends or forecast, are not indicative of the future or likely performance of the Fund or the Manager. The value of units in the Fund, and any income accruing to the units from the Fund, may fall as well as rise. Investors should note that their investment is exposed to fluctuations in exchange rates if the base currency of the Fund and/or underlying investment is different from the currency of your investment. Units are not available to US persons.
Applications for units of the Fund must be made on the application forms accompanying the prospectus. Investments in unit trusts are not obligations of, deposits in, or guaranteed or insured by First State Investments (Singapore), and are subject to risks, including the possible loss of the principal amount invested.
Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same.
In the event of discrepancies between the marketing materials and the Prospectus, the Prospectus shall prevail.
In Singapore, this document is issued by First State Investments (Singapore) whose company registration number is 196900420D. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. First State Investments (registration number 53236800B) is a business division of First State Investments (Singapore). The FSI logo is a trademark of the Commonwealth Bank of Australia or an affiliate thereof and is used by FSI under licence.
First State Investments (Singapore) is part of Colonial First State Global Asset Management (“CFSGAM”) which is a member of Mitsubishi UFJ Financial Group, Inc. (“MUFG”), a global financial group. CFSGAM includes a number of entities in different jurisdictions, operating in Australia as CFSGAM and as FSI elsewhere.
MUFG and its subsidiaries are not responsible for any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.