117. Investing in airports, mobile towers and renewables

4 February 2020 (pre-recorded 2 February 2020)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.

[INTRODUCTION]

Ryan Lightfoot-Brown (RLB): Hello and welcome to the Investing on the go podcast, brought to you by FundCalibre. I’m Ryan Lightfoot-Brown and today I’m joined by Peter Meaney, the Elite Rated manager of the First Sentier Global Listed Infrastructure fund. Peter, thank you very much for your time today.

Peter Meaney (PM): Thanks Ryan.

[INTERVIEW]

[0:21]

RLB: Now it’s been quite the year for infrastructure, quite the year for many things, but in infrastructure, it’s usually one of the less volatile areas of the market. But there are some areas that have been particularly hard hit by the pandemic. Perhaps we could talk about some of the winners and the losers in a lockdown environment, maybe starting with sort of roads, rails and airports?

PM: Yeah. It’s certainly been a challenging year for infrastructure, as you say, traditionally, a more defensive asset class, given the tangible sort of cashflow generating businesses that we invest in. But you know, COVID has had an impact that’s certainly been unprecedented. The lockdowns that followed COVID, had very direct impacts on transport infrastructure. So I agree that’s a good place to start.

The biggest impact was really felt in the airport sector. We’ve seen travel around the world, cease. Intercontinental or international traffic is down more than 90% and, you know, until, you know, we get some success on vaccinations it looks like that that will continue, you know, to be down a lot. Domestic and sort of intra-EU travel has been a little bit better. You know, we’ve seen when lockdowns have been eased, you know, domestic travel sort of getting back to somewhere around 50% of where it was before. Some of the regional travel back to, you know, sort of 30 or 40%. So there are signs that when lockdowns ease, you know, things can recover quite quickly. The thing with airports is, is that it’s the international passenger that’s really valuable. They tend to pay a lot more to land at an airport, in terms of passenger charges. They spend a lot more at the airport and that retail component, as you know, you know, airports around the world now make a lot of money from, from retail spending. And so, you know, that Chinese passenger for example, is very valuable. So we really need them to return, for airports really to recover their earnings in a significant way. Outside… so airports, I guess we’re taking a bit more of a cautious approach where we have had investments they’ve been really focused on lower leverage and more leisure travel. So Aena, the Spanish airport, or Zurich airport, you know, we think are examples of better positioned companies.

When it comes to other transport, railways, passenger rail has really struggled, a bit like airports. Shinkansen bullet trains, for example, in Japan have been down a lot. Freight railroads have recovered better. So we have seen a lot of volumes being moved on freight despite the COVID crisis. The thing we’re most excited about is the toll roads. We do think that roads will recover the most quickly. We think that people will prefer a private vehicle to public transport, they don’t want to be on a subway or a bus, they want to be in a private vehicle and social distance. So that’s where we have a most significant overweight position. And we do think that will come back in the next few quarters so well.

[3:54]

RLB: Thank you, well actually that leads me onto my next question: what areas of infrastructure are set to benefit, or have actually held up quite well? I know we’ve talked about toll roads, but are there any other areas of infrastructure?

PM: Yeah. Toll roads will bounce back. You know the other area that has done well over the last year has been anything in the communications space. So mobile towers, data centre, have held up really well. And that’s probably not a surprise given how well tech in general has done across the market. Towers, they’re contracted revenue streams. The acceleration of move to mobile data has come through during COVID and obviously we’ve got 5G and that upgrade cycle. You need a lot more towers to provide that high frequency intensity, you know, 5G network and towers will clearly benefit from that. Data centres clearly, as we move more into the cloud and that process has accelerated both through corporations and, you know, retail demand on Amazon and so forth. Data centre usages has gone up as well. So their growth has accelerated and they’ve been clear beneficiaries.

I guess the other area that we might come to is the utilities. Utilities have held up quite well. Although they held up when the market initially fell and they’ve been, which is great, but then they’ve been left behind as the market has rallied back. You know, bit more boring and defensive, you know, people have gravitated to cyclical growth and tech. And so they’ve been left behind a little bit. The one bright spot has been renewables within the utility space, which has done well.

[5:49]

RLB: Yeah, I imagine it would really, because as we look forward, we’re looking to, I mean, the theme we’re using over here is the ‘building back stronger’ initiative, lots of green infrastructure going on at the moment. Are the opportunities as big as people think they’re going to be, what’s your sort of outlook for the renewable sector?

PM: Yeah. Things are rarely as big as the headlines would suggest, whatever that might be. But certainly in the renewables space, there are a lot of exciting things going on. You know, the green new deal in Europe, you know, Biden and the Democrats proposals, you know, trillion dollar plus stimulus in the US. There’s a lot of reasons to be positive on the renewables space. We’ve clearly seeing through COVID and out the other side an acceleration of investment in wind farms, in solar panels, the transmission networks that need to tie all that together, you know, will benefit. We’re seeing an evolution in offshore wind. That’s quite well-established in Europe, particularly Northern Europe. And as we move towards green hydrogen, that’ll get another lift in supporting that industry. In the US, offshore wind is relatively new and companies like Orsted to taking that capability. SSE we own in the portfolio is clearly a beneficiary in you know, in the UK.

But there are US companies that we own in the portfolio, offshore wind, the likes of Dominion [Energy] and Eversource [Energy] will be beneficiaries in the Northeast and Virginia. And actually, the world’s largest renewable energy company, which is the largest stock in the portfolio, Nextera Energy. They’re based in Florida, they’re focused on onshore wind, solar, battery storage, and some early developments into hydrogen. And what’s exciting in the US, the electric vehicle rollout. Biden is really supportive of that development. That will definitely lift their growth and we do, we do see growth lifting from four to six to even 8% for these utilities, which for boring regulated businesses is I think really interesting growth.

[8:26]

RLB: I’m sure many of our listeners would jump at the chance of an 8% growth at the moment for some of their investments. And perhaps with those opportunities, there are other industries that are going to suffer, particularly oil and gas rated services. What’s going to happen to their pipelines, for example, if less oil is used. Is it a death knell for that industry?

PM: Yeah, it’s probably more death by a thousand cuts than something, you know, more dramatic. But there’s no doubt as we move to net zero by 2050, which Europe is clearly aligned to. And, and I think under a Biden administration, the US will align to quite quickly as well. But under that scenario, and we’ve written a few papers on this, we clearly see a structural decline in oil demand. I think that’s a natural outcome, from the move to electric vehicles and ultimately to hydrogen as well. Some of the hard to abate sectors like steel, cement manufacturing, airline or aviation, that will take longer, but it’s certainly doable by 2050 with hydrogen. So we’ve been building into our forecasts that structural decline of oil. I would differentiate that though with gas and natural gas liquids or NGLs. You know, gas will still be a very important transition fuel to support renewables that are intermittent by nature. We need some, some gas generation to support that, which is very flexible. And you know, until renewables are fully developed, we probably need some gas to support hydrogen development as well. And NGLs are the input to plastics and we’ve seen, you know, the world still demands a lot of plastics and we’ve seen all through COVID that actually plastic demand went up with, you know, ordering online, Amazon deliveries and so forth. We still think there will be very strong demand for NGLs, petrochemicals and ultimately plastics that, of course also go into the cars like Tesla’s that you know still you know, have strong demand around the world.

[10:55]

RLB: And now one of the big attractions of the asset class in the infrastructure space is the contracted income streams that you get from there. How has the income of the fund held up particularly in light of other equities having big cuts and reduction bond yields as well?

PM: Yeah, this is really important to get a whole portfolio perspective. I think, you know, when people looked at infrastructure there’s been a lot of focus on the airport space and some of the sectors that have really struggled, but actually at a portfolio level, when you take into account the utilities and the towers, and, you know, the toll roads sort of bounced back quite well. What we’ve seeing is income has continued to be produced from our companies. And actually, as we’ve gone through calendar 2020, and we push into 2021, the actual impact on the entire portfolio has only been in a decline in income of about 10%. You know, you compare that with a broader UK equities market. I think I saw some stats saying, you know, dividends were down about 44, 40, 50%.

RLB: Yeah about that.

PM: That’s a real contrast. I look at the income being produced and what’s been delivered. And then I’ll look at the performance differential between the broader market and the infrastructure. And it doesn’t make sense to me. I think infrastructure should have performed a lot better. I think the fundamentals support that view with the income being produced. And I guess, you know, therein lies the opportunity. You know, if you’ve done really well in some other sectors, like tech and perhaps you’re thinking a bit more defensively, look at something that’s been left behind then, you know, maybe infrastructure could fit that bill for you.

RLB: Well, that seems like a very good note to leave it on Peter. It’s been really interesting. Thank you very much for your time today.

PM: Thanks, Ryan.

RLB: And if you’d like to know more about the Elite Rated First Sentier Global Listed Infrastructure fund, please visit our website fundcalibre.com and for more from our Investing on the go podcast, please don’t forget to subscribe via your normal channels.