Valuation of Infrastructure Assets Q3 2024

Portfolio Manager, Simon Ong, discusses trends affecting infrastructure sector performance and reviews current valuations.

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 cashflows allow for far more predictability in outcomes especially in times of significant economic slowdown.

Key Takeaways at a Portfolio Level Include:

Strong performance in Q3 2024 has led to normalisation in 5 year equity IRRs from the heavily discounted levels seen in the quarters prior. Despite this, valuations are still considered attractive.

Fundamental outlook continues to be constructive:

• Electric Utilities – AI/data centre growth represents new business for Utilities, as increased power consumption necessitates increased grid investments, on top of the growth driven by energy transition and resiliency spending. This is true particularly for North American and European utilities.
• Energy Infrastructure – AI/data centre colocation near gas transmission infrastructure represents a new business case for Midstream companies, particularly in the U.S. Midstream. This is upside to the growth driven by coal-to-gas switching, LNG exports, and near-shoring/manufacturing growth themes.
• UK Water Utilities – draft determination for next 5 year tariff cycle has established a floor to returns, and expected to be upgraded in the final decision at year-end, especially considering the UK government’s stance towards the need to attract capital for investments.
• European Airports – strong air travel demand in 2024, particularly at tourist destinations such as Spain. Slowing down to low to mid-single digit traffic growth in 2025 is expected.
• Toll Roads – still seeing strong traffic and tariff growth in select North American markets, including Toronto, Dallas Fort Worth, Virginia and North Carolina.
• North American Freight Rails – in ‘bottoming’ phase of freight recession cycle, with early signs of inflection.

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