Roads to riches
High returns keep shareholders happy.
April 4, 2007
Beth Quinlivan, The
Sydney Morning Herald
The debate about whether listed
infrastructure stocks were set up mainly to
generate fees for investment bankers or to
secure defensive long-term investments suitable
for anyone looking for a reasonable yield is as
strong as ever.
It's more than a decade since the first of
the infrastructure groups was launched on the
Australian investment scene and, excluding the
public utility groups, infrastructure funds
listed on the stock exchange are valued at close
to $35 billion.
The biggest - and oldest - is
Infrastructure Group, worth $10 billion with
toll roads in Australia, Europe and North
The smallest - and newest - is RiverCity,
which floated last year. It is building a
north-south bypass in Brisbane due to open in
2010, but the price has dropped 20 per cent
since listing, to $252 million.
In the middle are Transurban (toll roads
mainly in Melbourne and Sydney), Macquarie
Airports (interests in six airports around the
world including a major stake in Sydney
Airport), Macquarie Communications (television
and radio transmission infrastructure), Babcock
& Brown Infrastructure (ports, power
transmission, wind generation), ConnectEast
(building Melbourne's newest toll road) and
Australian Infrastructure Fund (interests in
nine airports, three seaports, light rail and
one toll road).
At face value - looking at the quality of
assets and the returns generated to date - there
is plenty to like about infrastructure
investments. They generate reliable and
inflation-indexed cash flows that are valuable
for a broad spectrum of investors, from
institutions to retirees running their own super
As far as returns, most have been pretty
impressive. Anyone who put money into Macquarie
Airports has enjoyed an average total return
over the past three years of 40 per cent a year.
The share price of Transurban has been flat
recently but it has returned 26 per cent on
average for the past three years. According to
Aspect Huntly, Macquarie Infrastructure has the
lowest average total three-year return - hardly
disastrous at 19 per cent a year for a mature
Ask the sceptics about infrastructure,
though, and they run through a series of
negatives. At the top of the list are the
complicated structures favoured by most
infrastructure groups which makes it difficult
for even professional analysts to understand the
cash flows and accounts.
Other negatives include the hefty fees that
are paid by the funds to managers and promoters
and high levels of gearing which make them
susceptible to interest rate rises.
And although the underlying businesses tend to
generate reliable cash flows, stock prices are
The larger funds trade as
triple-stapled securities. Investors buy shares
or units in three separate corporate entities
which trade as a single unit. For Macquarie
Airports, the traded security consists of units
in two trusts (which hold the assets) and equity
in a Bermuda-based company.
With Macquarie Communications, securities are
made up of equity in both a local and an
international company (Bermuda) and units in a
trust. Transurban and others follow roughly the
The funds say they use these structures
because they are financially efficient but it
really means investors end up having to take it
on faith that the managers know what they are
doing. The chances of ordinary shareholders
making sense of the information provided -
enough to pick up warning signs or follow
important developments - is pretty slim.
Common practices, such as treating asset
revaluations as revenue, also sit uneasily with
some more conservative investors.
Macquarie Infrastructure, for example,
the $1443 million reported net profit for the
July-December half-year was heavily dependent on
asset revaluations. The group reported revenue
from its toll roads of $121.5 million for the
six months, but further revenue of $1160 million
was booked after asset revaluations.
"The assets are unilaterally good - if you
look across the funds, it is hard to find duds,"
says Clinton Wood, analyst with Deutsche Bank.
"Investors are getting decent yields,
infrastructure looks reasonable value among the
But he notes not everyone is entirely
comfortable with the sector. "Some of the
institutions still won't touch infrastructure
because of the structures and fees. Prices also
tend to whip around on sentiment.
"But the market is maturing. If you compare
infrastructure to property, infrastructure is
still smaller and impacted by quirky accounting.
The big difference is that with property you're
getting 5 per cent yield. With some of the key
infrastructure names, you're getting 7 to 8 per
cent yield. In my mind, the risk reward is still
in favour of infrastructure."
Prices across the sector dipped in the middle
of last year although most picked up again by
the end of the year - in some cases up 30 per
cent of the mid-year lows. In more recent
months, the three Macquarie funds have
outperformed the other infrastructure stocks,
with not much excitement anywhere else.
Wood says last year's falls followed a
combination of investors cashing out of
defensive investments to allow them to buy
resources stocks and negative sentiment
following interest rate rises and high oil
prices, especially the impact on toll road and
So with the outlook for
interest rates uncertain, investors should ask
is it a good time to buy infrastructure?
"They are defensive stocks and that has been
one of the recent attractions, but when interest
rates go up, the stocks are sold down," says
Luke McNab, an analyst from broking firm ABN
As for recommendations, McNab believes the
pick of the sector is Macquarie Airports and has
a price target on the stock of $4.50 (trading
"[Macquarie Airports] reported a solid result
in 2006 but the real story is what is happening
in 2007. We expect strong earnings growth from
core assets, the sale of Birmingham airport, the
refinancing of Brussels airport to fund a
special distribution, buyback or acquisitions,"
Wood takes a different view. After its recent
price rises, he believes Macquarie Airports is
fully valued. He thinks there is better value in
Transurban and Australian Infrastructure.
"Australian Infrastructure has a very good
portfolio but gets overlooked because it is
small. But its airport interests are in some of
the fastest growing population areas, especially
Perth and the Gold Coast."
He says the upcoming sale of the 15 per cent
stake in Perth Airport owned by British group
BAA (following BAA's takeover by Spanish
infrastructure group Ferrovial) will update the
real value of the asset. Given the demand for
quality assets, he believes bidding for the
facility will be strong. He says potential US
acquisitions will underpin price rises for
Transurban over the next year.