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Infrastructure Insights Video

Valuation of Infrastructure Assets Q2 2021

In the latest Valuation of Infrastructure Assets, Portfolio Manager Nick Langley details how ClearBridge infrastructure portfolios are positioned to meet a market where vaccines are improving the visibility of cash flows for toll roads and freight rail, though COVID-19 variant strains are complicating global reopenings, and where utilities are balancing interest rate headwinds with the strongest growth rates in decades

 

Key takeaways at a universe level include:

  • Valuations remain attractive on a medium to long-term excess return basis.
  • EV/EBITDA multiples and Dividend Yields are misleading for infrastructure stocks due to the significant but short-term reductions in earnings and dividend, which make them appear expensive. 
  • Listed infrastructure continues to provide attractive valuations when compared to unlisted infrastructure, but with the added liquidity and a greater opportunity set.
  • Challenges continue with variant COVID strains and vaccine supply constraints impacting mobility, as differentiation has begun to occur within the infrastructure asset class.
  • The essential nature of utility cashflows however allow for far more predictability in outcomes.
  • Nevertheless, these are long duration assets so short-term uncertainty has little effect on valuations.

Key takeaways at a portfolio level include:

  • Likely peak global growth and stimulus conditions saw transport and energy infrastructure continue their recovery, while renewables in the US and Europe continued to be soft.
  • For portfolio stocks, excess return over cost of capital (over 5 years) points to both Infrastructure and Utilities being attractive.
  • Comments by management of portfolio stocks indicate -
    • Infrastructure – increasing speed of the vaccine rollout (especially in the developed world), saw improved visibility in cashflows from toll roads and freight rail. The outlook for traffic on commuter rail and airports remains limited, though is expected to improve as we move through 2021.  
    • Utilities – opposing forces of rising global bond yields (negative) and utilities having some of the best growth prospects in decades (positive), impacted these essential service assets during the quarter.
    • Renewables –valuations in renewables have corrected (and likely bottomed) post the YTD pull back.
    • Dividends – transparency of dividends remains high in utilities and improving in transport infrastructure.
    • Regional divergences are now significant as the Delta variant takes hold in countries with low vaccination rates.

For the complete Valuation Presentation Pack, please contact our Distribution Team.

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