Valuation of Infrastructure Assets Q1 2024

Portfolio Manager, Simon Ong discusses trends affecting infrastructure sector performance and reviews current valuations. Among user-pays infrastructure, population growth and industrial activity are driving more toll road traffic and higher leisure travel is lifting airports. Among regulated utilities, rising interest rates remain a headwind, but regulators, particularly in Europe, are raising utilities' allowed returns as they invest to grow their asset bases to support the energy transition.

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 have normalised for infrastructure stocks (especially airports and passenger rail) as the traffic and earnings recovery matures.

• 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 cash flows allow for far more predictability in outcomes especially in times of significant economic slowdown.

Key Takeaways at a Portfolio Level Include:

• ‘Risk-on’ equity market in Q1 2024 saw the more defensive global listed infrastructure sector underperform.

• 5 year Equity IRRs continue to be at attractive levels relative to history.

• 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 seen evidence of a slowdown in forward-looking data. U.S. freight rail companies have seen the volume environment improve modestly, although excess transportation capacity is keeping the pricing environment subdued.
  • Utilities – Given limited evidence on a significant slowdown in GDP, the utilities continue to lag from a relative performance perspective. Longer term we remain constructive on the growth prospects due to policy in favour of the energy transition.
  • Renewables – Valuations in renewables remain compelling, although longer duration assets (and cash flows) remain sensitive to rising yields. Issues with certain segments of the renewable space have been challenging (for example offshore wind), although we are starting to see fundamentals improve.
  • Energy Infrastructure – Cashflow generation from pipelines remains robust due to the 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.