The infrastructure stock with better earnings growth potential than Transurban

The likes of Transurban (ASX: TCL) and Auckland Airport (ASX: AIA) may be ASX darlings for infrastructure investors, but Resolution Capital’s Sarah Lau believes investors can do better. She is finding equivalent high-quality options overseas – with much more favourable valuations and the prospect of double-digit growth in coming years.

“When we look globally, we can see a more diverse opportunity set that's really being driven by sector themes in terms of its long-term growth and really, really attractive opportunities,” she says, noting that one of the companies she likes has substantial assets in North America and benefits from mobility trends there.

It’s not to say that Australian options aren’t also excellent performers in a portfolio, but that going global for infrastructure could be highly beneficial for an investor – the ability to access defensive growth, in a far more diversified way, and - more often than not - with more attractive valuations.

In this episode of The Pitch, Lau discusses the value of using listed infrastructure, and investing beyond Australia. She explores some of the biggest misconceptions about investing in infrastructure and she also shares a stock that offers more attractive valuation qualities compared to Transurban in coming years.

Edited transcript

Why should investors be thinking about using listed infrastructure in their portfolios?

The global listed infrastructure asset class is a defensive growth asset class, and it is really well suited to growing wealth over the long term by compounding.

These are hard assets that are critical to the economy and provide essential services. What this means is they have monopolistic characteristics and it means the cashflows they provide are sustainable. Over the long run, they will capture some megatrends such as digitisation, decarbonisation and mobility, and provide growth above inflation for investors.

What are some of the misconceptions that you hear about infrastructure and how do you counter these?

There are two key misconceptions in infrastructure.

Firstly, that it’s a boring, low-growth, interest rate sensitive asset class.

It’s not boring, and in our portfolio over the next three years, we are expecting earnings growth of 7% - we think that is going to accelerate as well. It’s less interest rate sensitive than most people would think because there is a high amount of inflation passed through from these assets – 87% of the portfolio is hedged to inflation.

A second misconception is that listed infrastructure is inferior to unlisted infrastructure.

To be clear, there's a very broad range of unlisted infrastructure. So there are very different risk categories amongst funds, but on an aggregate benchmark basis, listed and unlisted infrastructure have provided very similar returns since 2001-2002. They've both provided 11% returns on a total return basis per annum over the same period, and the quality of the assets in listed infrastructure is very high. In particular, there is less competition and commodity exposure in terms of revenues in the listed space versus the unlisted space.

Why should investors broaden their exposures globally rather than just relying on Australian names like Transurban?

We think the Australian opportunity set is very high quality, but at the same time, it’s very small. Transurban is a company that is very high quality, but we look globally for the best ideas.

The name we prefer is Ferrovial (BME: FER). It’s listed in Spain, but the assets are predominantly in North America. Ferrovial owns the 407 toll road in Toronto, which is considered to be one of the highest-quality toll road assets globally. It owns managed lanes in the US – a lot of them are in that Dallas-Fort Worth catchment. It is a good inflation hedge like Transurban. They are both on 23 times EV/EBITDA, but Ferrovial is growing its earnings at double-digit rates, whereas we forecast 7% earnings growth for Transurban over the next three years.

Other opportunities we can access globally include, for instance, airports. Sydney Airport was taken private and we can no longer access that. We can access Auckland Airport on the ASX but, for us, it’s trading at 18 times EV/EBITDA and we see European airports trading at roughly half of that multiple.

When we look globally, we can see a more diverse opportunity set that is being driven by sector themes in terms of long-term growth and really attractive opportunities.

How can investors think about incorporating exposure to listed infrastructure in their portfolios?

Global listed infrastructure offers diversification benefits when combined with other asset classes in a portfolio. We tend to look at it as part of the Real Assets allocation, which includes property. These are really complementary asset classes – both offering inflation protection in high-quality, hard assets.

The risk for global listed infrastructure really sits between bonds and equity, and the returns offered by the sector have been very competitive when compared with general equities.

Since 2001, global listed infrastructure has generated total returns of 10.3% per annum with volatility of 13.5%. Over that same period, global equities have generated total returns of 8.5% with volatility of 16%.

It does offer those diversification benefits. When we look at model retail portfolios, the global listed infrastructure allocations typically sit between 3-5% and we think the asset class offers a really good opportunity to compound and create wealth over the long run.

Our portfolio is offering 7% earnings growth in the next three years, which we see as increasing over time, and importantly, these assets are positioned to provide above-inflation growth for investors over the long run.

What tips do you have for investors looking at infrastructure?

Being selective is really important. Benchmarks don’t offer exposure to what we consider necessarily core infrastructure.

We like to keep things pretty simple. We like quality assets with underappreciated optionality. We like solid balance sheets and we like capable management with skin in the game.

Ultimately, we think valuations will follow earnings. Valuations, as we see it today, have actually reset for the higher interest rate environment. Over the long term, global listed infrastructure offers upside above inflation, tied to really long-term megatrends such as decarbonisation, mobility and digitisation.

Access to income and growth over the long term

Sarah and the team are focused on companies that own physical assets or concessions that provide essential services. These assets typically have high barriers to entry, require significant capital investment as well as generate long-dated and predictable cashflows. To learn more, visit the Resolution Capital website, or the fund profile below.

Managed Fund

Resolution Capital Global Listed Infrastructure Fund

Global Shares

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