Infrastructure and utilities remain attractive, renewable valuations ‘stretched’
Infrastructure assets, which range from utilities such as electricity generation, to assets that facilitate the movement of the population, such as airports and toll roads, faced a near “perfect storm” in 2020. Historically billed as a less volatile alternative than direct equities, few infrastructure investors, or anyone for that matter, saw the pandemic and associated global shutdown coming.
While hindsight is a wonderful thing, all eyes must now turn to the future. Despite hope that the vaccines would quickly see a return to normal function in the economy, it is clear now that the recovery will be uneven and slower than anticipated. That said, Shane Hurst of specialist global listed infrastructure investor Clearbridge Investments says there is “a growing opportunity set” for long-term investors.
Speaking in the latest ‘Valuation of Infrastructure Assets’ update, Hurst highlights how the increasing speed of the vaccine rollout, particularly in the US and UK, is leading to improved visibility in cash flows for toll roads and rail, in particular. While the “outlook for traffic on commuter rail and airports remains limited,” he suggests it will improve significantly through 2021.
Investors and markets tend to extrapolate short-term and recent events into perpetuity, which is now prevalent in infrastructure assets. Hurst notes that these are traditionally long-term and long-duration assets, hence short-term uncertainty around cash flow has little effect on valuations. He suggests that valuations “remain attractive on a medium to long-term” basis and highlights the issue of using traditional Enterprise Value-to-Earnings multiples and dividend yield comparisons for investment decisions.
Infrastructure earnings and dividends are currently at cyclical lows, with management having hoarded cash as revenue fell, and this factor is making infrastructure “appear expensive” on traditional measures.
“Listed infrastructure continues to provide attract valuations when compared to unlisted infrastructure.” with owners of the latter (including pension funds and institutional investors) under no pressure or urgency to slash valuations, despite their listed competitors having fallen significantly.
Speaking at a portfolio-specific level, economic stimulus has clearly benefited a recovery in the transport and energy sectors, while renewables “took a pause” after a stellar run on the back of President Biden’s policy announcements. Both ‘Infrastructure’ and ‘Utilities’ offer attractive valuations, according to Clearbridge.
Infrastructure usage is expected to improve as the world moves through 2021, however, the risk of mutant COVID strains and more outbreaks remains elevated. Utilities face the “opposing forces” of higher bond yields and the “best growth prospects in decades,” with the key question being whether the latter likely can win out despite growing inflation concerns.
Valuations of some renewable assets have become stretched, dividend transparency has improved, but regional divergences are becoming more obvious based on each countries ability to vaccinate and shut-down outbreaks.