Valuation of Infrastructure Assets Q3 2023

In our latest Valuation update, Portfolio Manager, Simon Ong discusses how rising rates throughout the quarter put pressure on risk assets globally. Although infrastructure was not immune, our constructive view on the medium to long-term growth prospects for the sector has not changed, and we continue to view valuations as attractive.

Key Takeaways at a Universe Level Include:

• Valuations remain attractive on a medium to long-term excess return basis.

• Forward looking EV/EBITDA multiples and dividend yields are beginning to normalise for infrastructure stocks (especially airports and passenger rail) as the traffic and earnings recovery continues.

• Listed infrastructure continues to provide attractive valuations when compared to unlisted infrastructure (although some unlisted transaction multiples have moderated recently), but with added liquidity and a greater opportunity set.

• The essential nature of utility cashflows allow for far more predictability in outcomes especially in times of significant economic slowdown.

Key Takeaways at a Portfolio Level Include:

• Excess return over cost of capital (over 5 years) points to both Infrastructure and Utilities being attractive. Risk/return beginning to tilt in favour of Utilities over Infrastructure.

• Comments by management of portfolio stocks indicate:
  • Infrastructure – Traffic on developed toll roads, commuter rail and airports continue to recover from the pandemic, and in some cases exceed pre-pandemic levels, such as leisure-based airports and select U.S. and EU toll roads. While recession is a potential risk to traffic, management teams generally have not yet seen evidence of a slow down in forward-looking data. U.S. freight rail companies have seen some softness in their volumes year-to-date and are expected to remain soft near-term as the economy works through an inventory de-stocking cycle. However, we note recent weekly volume data has shown year-on-year improvement.
  • Utilities – Rising global bond yields continue to weigh on utility performance, offsetting the best growth prospects in decades due to policy in favour of the energy transition (positive).
  • Renewables – Valuations in renewables remain compelling, although longer duration assets (and cash flows) remain sensitive to rising yields. Positive policy developments are building traction.
  • Energy Infrastructure – Cashflow generation from pipelines remains robust due to highly contracted nature of revenue, despite softness in commodity prices.
  • Dividends – Transparency of dividends remain high in utilities and are improving in transport infrastructure.

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