It is hard not to like the long-term prospects for well-run infrastructure companies. Tens of billions of dollars have to be spent on upgrading transport and other infrastructure this decade to cope with population growth and lift business productivity.
Investors have plenty of choice: unlisted managed funds that specialise in local and global infrastructure investments, ASX-listed infrastructure entities, and large and small service companies that do the heavy lifting on infrastructure projects.
Among ASX-listed infrastructure companies, I have long favoured Sydney Airport and APA Group, and, until recently, AusNet Services. Sydney Airport and the APA Group have ideal infrastructure characteristics: monopoly-like assets that are hard to avoid.
Construction, contracting and engineering companies are also potential winners from an infrastructure boom. Obvious candidates are Lend Lease, Leighton Holdings, Macmahon Holdings, UGL, and Adelaide Brighton. But uncertainty over the timing of any infrastructure “boom”, because of concerns over government finances, is a concern.
Specialist service providers might be a better bet for experienced investors who are comfortable with small-cap stocks. Civil engineering firm Seymour Whyte is an example. The Brisbane company services a range of prominent transport and utilities infrastructure projects.
To recap, Seymour Whyte listed in a dreadful Initial Public Offering market in May 2010 after raising $19.8 million at $1.10 a share. It doubled the issue price within a year of listing, but tumbled to 75 cents in mid-2012 after management changes and lower-than-expected earnings.
The share price almost recovered to its previous peak in early August 2014, only to tumble from a 52-week high $2.24 to $1.50 after forecasting a soft first half for its transport-infrastructure business.
Chart 1: Seymour Whyte
The market looks too bearish on Seymour. Not even $130 million in new contracts announced this month could put a rocket under its shares. Seymour jumped 10 cents on the news, but it could have expected larger gains given the size of the contracts, for what is a $131-million company.
It was awarded an $85 million contract by New South Wales Roads and Maritime Services to undertake upgrade works between Hartley Valley and Forty Bends in the Blue Mountains. Managing director David McAdam said in a statement: “The win underpins our strategy for growth in delivering bigger, more complex projects independently.”
It’s a good strategy. Seymour has vastly expanded the type of infrastructure projects it advises on, and its national presence in the past year. It advised mostly on roads, bridges, rail and marine projects in Queensland and New South Wales. Now, it has a presence in all States and Territories except South Australia, and growing work in utility and resource projects.
Seymour acquired the Rob Carr civil engineering construction business in February for $27.5 million in cash and 9.6 million Seymour shares, and looks well placed to make other acquisitions.
The strategy should pay off in the next three years once Seymour gets through current softness in its core markets. FY14 revenue growth of 13.4 per cent to $311 million was okay in a softening market, and underlying earnings rose 53.4 per cent to $17.8 million. A final 5-cent dividend per share took the full-year dividend to 7.5 cents, fully franked.
Seymour Whyte ticks several boxes. Return on Equity (ROE) is solid at 16.2 per cent in FY14, although well down from the 41.8 per cent achieved in FY10. Five consecutive falls in ROE are not a good look – always seek companies with rising ROE as it leads to a higher intrinsic value in time. But Seymour’s ROE is still better than many small service companies in this market.
The balance sheet is strong. Long-term debt was only $2.8 million at the end of FY14, and the cash balance was $40 million. That gives Seymour plenty of firepower to acquire smaller infrastructure service providers, expand faster interstate, and take on bigger projects.
The company’s forward order book at FY14 was $209 million (before the $130 million in new contracts). It looks well placed to win more transport infrastructure work given its involvement in several key projects in Queensland and NSW, and reputation in this field.
Seymour estimates a contestable market of more than $12 billion in FY15-18 in transport infrastructure, and $4 billion of work in utilities infrastructure.
At $1.50, Seymour is on a forecast PE of just over 8 times, based on consensus analyst forecasts. That looks a touch low for a quality company with strong leverage to growth in transport infastructure projects and exposure to government clients, which are less likely to kill projects than mining, oil or gas customers.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at October 30, 2014.