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As each new day dawns it seems the only good news to greet investors is bad news that is not as bad as it could be.  Global worries from Europe, China, and the US have driven thousands of retail investors from share markets around the world.  It seems the only way to ease the pain is to get out of equities. 

But there is another way.  Contrary to the alarm bells emanating from the prophets of doom, there are actually bright pockets in the share market.  Health care has been one of those pockets but the returns from that sector pale in comparison to the stunning year over year gains of Australian infrastructure funds. 

Infrastructure funds are available to retail investors through their brokers or online trading accounts just like equities.  Professional managers make fund investment decisions on your behalf and investor returns include capital appreciation as well as income from dividend distributions.

There are a variety of infrastructure assets held by funds ranging from regulated assets’ like water and sewerage utilities, to distribution pipelines and transmission wires; to user fee assets like toll roads, airports, ports and railways; to competitive assets like communications, power generation and energy providers.

Times may be tough but the future of global infrastructure development is bright.  The Canadian Imperial Bank of Commerce estimates $US35 trillion will be spent on infrastructure over the next 20 years.

The OCED (Organisation for Economic Co-operation and Development) is even more bullish, predicting USS41 trillion from the year 2005 to 2030.  What’s more, the needs include developed countries as well as emerging markets.  The OECD puts US and European infrastructure spending to 2030 at $US15.6 trillion, compared to $US15.8 trillion in the Asia Pacific region.

It takes both the need and the political will for major infrastructure investments and in Australia we have both.  Here is an assessment of infrastructure condition as of 2010 from Engineersaustralia.org

A few months ago Opposition Leader Tony Abbott made infrastructure development a political issue as he outlined his vision for infrastructure investment in roads, rail lines, port facilities, and dams over a 15 year period.  He would work to increase private investment and require a cost benefit analysis for any federally funded project over $100 million dollars.  Infrastructure development is now a campaign issue and the chart above indicates as a nation we are due for some infrastructure upgrades.

The following table lists 7 of our top performing infrastructure funds by market cap.  We have included current share price as well as 52 week highs and lows.  To illustrate the potential here we also include the average annual rate of shareholder return over 1 year, 3 year, and 5 year periods.  Here is the table:

Fund

Code

Mkt Cap

Share Price

52 Wk Hi

52 Wk Low

Share-holder Return  1Year

Share-holder Return 3 Yr

(avg annual rate)

Share-holder Return  5 Yr

(avg annual rate)

Dividend Yield

SP AusNet

SPN

$3,440M

$1.03

$1.14

$0,80

23%%

20.1%

5.2%

7.8%

APA Group

APA

$3,171M

$4.92

$5.34

$3.53

31.3%

30.7%

13.8%

7.0%

Duet Group

DUE

$2,075M

$1.87

$2.0

$1.48

16.0%

0.7%

0.7%

9.5%

Spark Infrastructure

SKI

$2,017M

$1.52

$1.58

$1.12

26.0%

26.0%

8.9%

6.7%

Australian Infrastructure

AIX

$1,521M

$2.45

$2.57

$1.62

31.2%

24.6%

2.5%

4.3%

Hastings Diversified Utilities Fund

HDF

$1,251M

$2.36

$2.44

$1.30

54.1%

50.4%

2.3%

4.3%

Envestra Ltd

ENV

$1,250M

$0.80

$0.84

$0.56

26.6%

26.5%

5.8%

7.2%

 

The largest fund listed, SP AusNet (SPN) is in the utility infrastructure business.  They manage a regulated network of electricity and gas distribution networks that serves over one million customers in south east Australia.  This is in reality an income stock as the regulatory environment safeguards cash flow which primarily goes out to investors via distributions.  Although they have no competition, there is a downside to the regulations as the cost of anticipated capital expenditures to expand and upgrade the network may not always be passed on to customers.  In addition, in a difficult economic environment, regulators may be reluctant to grant needed rate increases.

A recent bond issuance and share offering for capital expenditures and growth investments soured some analysts on the stock, although Macquarie is still bullish.  They have a BUY rating in the belief SPN has a stronger asset base and higher yield than its peers.  The market did not react favorably to the capital raising efforts, leaving savvy investors with a potential buying opportunity.  Here is their one year share price movement chart:

APA Group (APA) is one of Australia’s largest natural gas infrastructure providers with transmission and distribution assets valued at around $9 billion dollars.  They have two advantages over others in the space.  The first is they are both owner and operator of the natural gas network with pipelines in every state.  The second is their diversified revenue base.  They have an investments division that owns interests in smaller gas-related infrastructure companies, including two in our table, Envestra (ENV) and Hastings Diversified Utilities Fund (HDF).  They also have an asset Management Division that provides operational and maintenance services to its part-owned companies and other smaller providers.

Right now they are awaiting ACCC (Australian Competition and Consumer Commission) approval of a takeover bid for Hastings.  HDF has the only existing link between the coal seam gas fields in Queensland and APA’s principal network.  As you may know, coal seam gas production is expected to expand dramatically to meet the demand for feedstock natural gas in LNG processing facilities.  Energy giant Santos has been reported to be planning new CSG wells in the thousands.  APA is well positioned to benefit.  Here is their one year share price performance chart:

 

The share price has stuttered a bit of late, probably because of the uncertainty over the Hastings bid.  Analysts have expressed concerns that APA may have to raise its offer.  A look at the chart shows ample dips as buying opportunities if you are ready to take some of your money off the sidelines and get back in the game.

Duet Group (DUE) has the highest dividend yield of any share on the table, but the lowest total 5 year average annual shareholder return.  Remember that shareholder return factors in dividend distributions as well as capital appreciation.

The company has undergone a restructuring to improve their cash position and simplify operations.  As a result they now have majority interest in only two major gas network transmission assets and one electrical.  Although they are owners of those assets, their complicated trust structure has them jointly managed by AMP Capital Investors and Macquarie Capital Group.

The majority of our major analyst firms have yet to be convinced of the soundness of the restructuring, but RBS Australia is wildly bullish, calling DUE their top pick in the utility infrastructure space.  Here is their year over year price movement chart:

Sparks Infrastructure Group (SKI) is another stable, predictable, regulated utility transmission owner and operator.  They have 49% interest in three electricity distribution companies serving Victoria and South Australia.  But this is a company apparently not content to sit in its safe niche.  Their goal is to expand beyond Australia and acquire assets in gas distribution and transmission as well as electricity; and assets in regulated water and sewerage assets.  They have a Smart Meter installation effort underway in Victoria and recently lost out on a bid to acquire the Sydney Desalinisation Plant; further evidence of their ambitious attempts to diversify their revenue base. 

Here is their one year share price movement chart:

The Australian Infrastructure Fund (AIX) is an incredibly complex diversified stapled infrastructure fund.  AIX is made up of two separate entities -Australian Infrastructure Fund Limited (AIFL) and Australian Infrastructure Fund Trust (the Trust) – which in turn are managed by Hastings Diversified which in turn is owned by Westpac.

What you really need to know about AIX is that it invests in Australian and European airports.  They like airports with long life spans which provide solid earnings from parking and shopping leases, airline fee increases, property appreciation, and of course passenger traffic.  The downside to this is without the government looking over your shoulder, economic downturns make revenue stability and growth riskier.  Right now, however, AIX is in a very good space.  The high Australian dollar over the last few years has driven many Australians off our shores to seek leisure opportunities.  While this has hurt hotel and tourism here, it has proved profitable for airport owners.

Don’t expect a rash of acquisitions from this company as they are committed to organic growth within their existing Australian airport holdings.  There are substantial infrastructure and other upgrades already in progress at their Perth, Queensland and Melbourne airports.

Here is their one year share price movement chart:

Hastings Diversified Utilities Fund (HDF) is in play.  As mentioned earlier, APA is trying to acquire ownership, but HDF management recommended rejecting an earlier cash and scrip offer and now Pipeline Partners of Australia has stepped into the bidding with its own offer amounting to $2.325 per share.  The prior APA offer was valued at $$2.13 and is awaiting an ACCC decision by 32 July 2012.  Hastings already recommended its shareholders reject that offer and as of 11 July 2012 The Australian is reporting Hastings Fund Management Board is going to recommend accepting the PPA bid.

And so the game is afoot as The Australian report goes on to say some independent directors on the Hastings board would like to see a better offer from APA, which is already a major shareholder in HDF.  To further confound the issue, Pipeline is a 50/50 joint venture between a Canadian pension fund and recently formed Utility Trust of Australia, a $2.6 Billion dollar Fund.  And who manages the Pipeline Partners Utilities Trust?  Hastings!!

Obviously the Hasting holdings in Queensland are of high value to have generated such lust in the competing bidders, with rumours of the possibility of a new player now emerging.  With a current share price at $2.36, retail investors like you and me should just let the big boys fight it out.  However, if APA loses out, watch for a buying opportunity with their shares.

Envestra Limited (ENV) is strictly a natural gas distribution company. The company has extensive transmission pipelines and distribution networks throughout Australia and in the Northern Territory.  APA holds a 32% interest in the company and operates the pipelines.  ENV sees their growth prospects from expanding their existing facilities and both building and acquiring new networks.  As you may know, government regulations in Queensland have increased the demand for natural gas there and carbon reduction policies there as well as the federal carbon tax bode well for the future of this company as long as the demand for natural gas continues to increase.  Their lack of diversification of any sort is a drawback, but for conservative investors, their yield and solid total shareholder return make them attractive.  Here is their one year share price movement chart:

If you like what you have seen, there are a total of 17 different Infrastructure Funds available for retail investors on the ASX.

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