Listed infrastructure offers sustainable growth and inflation-protected income

Global listed infrastructure is well positioned in this environment as the asset class offers investors sustainable growth and inflation protected income streams.

We see six major investment themes impacting global listed infrastructure companies as we move through 2010; these being volume recovery, acceleration in M&A activity, balance sheet optimisation, government stimulus packages, potential for increased political interference and further closing of the ‘value gap’.

Earnings from infrastructure companies tend to be driven by the nature of their services, regulated returns on an existing asset base, contracted income and inflation protected price escalators.

However, some infrastructure assets are exposed to throughput volumes. As the global economy improves in 2010, we believe volume recovery from toll roads, airports, ports and railways can provide upside surprise to earnings expectations.

As listed markets focus on short-term uncertainties, long-term investors have been acquiring listed infrastructure companies. We expect M&A activity to accelerate in 2010 as credit markets continue to normalise, economic growth accelerates, corporate confidence improves and listed infrastructure companies remain undervalued on a long-term perspective.

Last year was the year of balance sheet repair for many companies. Robust cashflows from global listed infrastructure companies mean we are now seeing an increasing number of infrastructure companies with under-geared balance sheets.

A large part of the growth in the global economy has been driven by government stimulus packages. Many listed infrastructure companies will benefit from this in 2010 through increased capital expenditure programmes, more constructive regulatory environments, government debt guarantees and potential privatisation of government-owned infrastructure assets.

Most infrastructure assets are subject to regulatory oversight and sometimes political interference. While we expect a more constructive regulatory environment in 2010 to promote new investment and efficiency, we are wary of increased political risk.

The final and probably most important investment theme is a closing of the ‘value gap’ we see in listed infrastructure companies today. While share prices have rallied off their March 2009 lows, many listed infrastructure companies are trading well below our long-term fundamental valuations. While we have seen a re-rating in multiples to more reasonable levels, earnings remain below trend and balance sheets have upside potential, both of which will drive increased long-term value for equity holders over the next few years. We believe current prices for global listed infrastructure companies still provide an attractive ‘value gap’ for long-term investors who are prepared to look through the short-term uncertainties the world still faces in 2010.

Peter Meany is head of global listed infrastructure securities at First State Investments