ASX Investor Hour · 8/16/2011 · ASX Investor Hour DISCLAIMER: The following material was...
Transcript of ASX Investor Hour · 8/16/2011 · ASX Investor Hour DISCLAIMER: The following material was...
ASX Investor Hour
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Presenter: Dennis Eagar, Portfolio Manager, Magellan Asset ManagementTopic: Advantages and pitfalls of infrastructure investment Date: 16 August 2011Location: Sydney Investor Hour
[2]
Advantages and Pitfalls of Infrastructure Investment
Dennis EagarPortfolio ManagerAugust 2011
[3]The Last Decade
• Tech Wreck
• 9/11
• SARS
• Iraq war
• Credit market melt down
• Recession
• Record oil prices
• Euro Region Sovereign Debt Crisis
• Emerging market inflation
• Natural disasters
• US debt rating cut
[4]The Last Decade
• Tech Wreck
• 9/11
• SARS
• Iraq war
• GFC
• Recession
• Record oil prices
• Euro Region Sovereign Debt Crisis
• Emerging market inflation
• Natural disasters
• US debt rating cut
Global Equities*
Return2.3% p.a.
* MSCI A$ Hedged
[5]The Last Decade
Global Equities Return*
2.3% p.a.
Global Listed
Infrastructure
Return*
9.9% p.a.1
1. Magellan Infrastructure Beta Fund Index
* MSCI A$ Hedged
* A$ Hedged
[6]The Next Decade
Global EquitiesReturn??????
[7]The Next Decade
Global EquitiesReturn??????
Global Listed
Infrastructure
Return1
CPI + 5%
1. Magellan expectation
[8]Agenda
• Australian Infrastructure ≠
Rest of the World Infrastructure
• Infrastructure Sector Investment Fundamentals
[9]Recent Australian Experience
• Australian infrastructure stocks have been more heavily geared.
• The externally managed investment vehicle model, i.e. management by an external party such as Babcock & Brown or Macquarie Bank, is almost unheard of outside of Australia.
• Listed greenfield toll road assets are only found in Australia.
The Australian experience was quite different from the rest of the world.
[10]Debt Levels in Australia vs Rest of the WorldGearing levels of Australian utilities are generally higher than their global comparables.
Source: Company accounts, Magellan research
Gearing of Utilities - Net Debt / EBITDA
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Enve
stra
DUET APASP A
usnet
Spar
kIT
C Hold
ings
PG&ENat
ional
GridW
esta
r
Snam R
ete G
as
Wisc
onsin
Ener
gyTe
rna
Con Ed.
NSTAR
Alliant E
nergy
Atmos E
nerg
y
WGL
Holdin
gs
[11]
Infrastructure Sector Investment Fundamentals
[12]What is Infrastructure?
• Magellan believes true infrastructure assets have two key characteristics:
– Essential for the efficient functioning of a community.
and
– Do not face significant:
Sovereign risk;
Competition; or
Commodity price risk.
Demand and revenue are relatively stable
Minimal pressure on cash flows
[13]Power Industry ExampleA disciplined approach to defining what constitutes “infrastructure” is essential to achieving predictable returns.
Generation Transmission Distribution Retailing
Unregulated 100% Regulated 100% Regulated Unregulated
[14]Case Study: Loy Yang A Power Station
• Largest power station in Victoria – 24% of installed capacity
• Lowest operating cost generator in the National Electricity Market
• Privatised in 1996. Horizon Energy owned 25%
• Sold for $0.07 in the $1 in 2003
Unregulated power stations do not provide reliable returns.
[15]Size of the Listed Infrastructure Market
Infrastructure falls into two main categories:
1.Utilities: energy transmission & distribution, water treatment and distribution; and
2.Infrastructure: airports, toll roads, rail, ports and communications infrastructure.
The global listed infrastructure universe is dominated by utilities (energy transmission & distribution and water). The total size is in excess of $600bn.
Listed Infrastructure & Utilities Universe
Infrastructure24%
Utilities76%
Source: Magellan Research.
[16]Utilities – Nature of Returns
• Because water and power utilities are natural monopolies, the prices they charge are regulated.
• Regulation is administered by a government body and is transparent and simple in concept.
• Regulation allows utilities to earn moderate returns with low potential for loss. It puts a “cap” and “collar” on those returns.
• Regulation means companies trade within a tight range of intrinsic value.
The regulation of utility earnings leads to stable financial results and, ultimately, stable investment returns.
[17]How does Utility Regulation WorkRegulators allow utilities to generate a fair return on the capital used in their businesses.
Regulated Asset Base
x Cost of Capital =
Prices Charged
Operating & Debt Costs
Required Earnings
-
=
Often with a modest margin
[18]Why is Financial Performance so Stable?Regulators allow utilities to generate a fair return on the capital used in their businesses.
Source: Magellan Research
US Electricity and Gas Utilities - Regulated ROEs
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
Average Regulated ROE = 10.5%
[19]Why is Financial Performance so Stable?Allowed Returns on Equity have been materially higher than 10 year bond yields for the last 30 years.
Source: Morgan Stanley Research
Allowed ROE in US Rate Cases (Mar-80 to Sep-10)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Mar-80 Mar-83 Mar-86 Mar-89 Mar-92 Mar-95 Mar-98 Mar-01 Mar-04 Mar-07 Mar-10
Average Allowed ROE 10 Yr Bond Rate
[20]Utilities - Financial Performance The returns from regulated utilities have been stable through the recession.
Source: Company accounts, Magellan Research
Utility group includes Alliant Energy , Atmos Energy , Consolidated Edison, ITC, NSTAR, PG&E, Southwest Gas, Westar Energy, WGL and Wisconsin Energy
ROE from 2004 to 2010 for the US based Regulated Utilities in MIF's Portfolio at 31 December 2010
0%
2%
4%
6%
8%
10%
12%
14%
2004 2005 2006 2007 2008 2009 2010
[21]Utilities are Stable
Consolidated Edison has enjoyed 34 successive years of dividend increases.
Consolidated Edison owns the Manhattan gas and electricity distribution systemSource: Bloomberg
Consolidated Edison - Dividend History
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
Dec-77 Dec-81 Dec-85 Dec-89 Dec-93 Dec-97 Dec-01 Dec-05 Dec-09
[22]Utilities are Stable
NSTAR recently paid its 476th consecutive quarterly dividend.
NSTAR provides transmission and distribution services in Massachusetts Source: Bloomberg
NSTAR - Dividends per Share from 2000 to 2010
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
$1.60
$1.80
Dec-99 Jun-01 Dec-02 Jun-04 Dec-05 Jun-07 Dec-08 Jun-10
[23]Utilities are StableWashington Gas has paid a dividend for 160 consecutive years and has increased that dividend for the last 35 consecutive years.
Source: Bloomberg; WGL
WGL Dividend History
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
$1.60
1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
[24]Toll Roads – Nature of ReturnsMature toll roads provide very predictable returns.
• Toll increases are regulated in the concession agreement
Prices are regulated not earnings.
• Toll roads exhibit very high free cash flow margins – often over 80%.
• As traffic on the alternative routes becomes more congested, the toll road becomes an effective monopoly.
• Traffic forecasting for a greenfield toll road is highly problematic.
It is an art not a science.
[25]Toll Road Prices are Generally Linked to CPIThe most attractive toll roads have the ability to increase tolls by at least the rate of inflation.
Asset Location Basis of Toll Increases
M5, Sydney Australia CPI
Eastern Distributor Australia Greater of 4.1% or basket of 67% AWE & 33% CPI
CityLink Australia Greater of 4.5% or CPI to 2015 then CPI
APRR France 85% of CPI
Atlantia Italy 70% of CPI
Brisa Portugal 90% of CPI
407ETR Canada At Owners Discretion
Western Harbour Tunnel Hong Kong CPI
Source: Magellan, underlying asset operators
[26]Cars Dominate Large City TransportThe complexity of modern trips and the historic focus of public transport on the CBD makes car travel unavoidable for most people.
Source: Transport NSW
Weekday Trips in SydneyDistance Travelled in 2008
12%
5%2% 2%
79%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Car Train Bus Walk Only Other
[27]Toll Roads Exhibit Low Price ElasticityTolls on Sydney’s Eastern Distributor have been increased 5 times since it opened with no measurable impact on traffic numbers.
Source: Transurban
Eastern Distributor Average Daily Traffic
20,000
25,000
30,000
35,000
40,000
45,000
50,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
$3.00
$5.00
$4.50
$4.00
$3.50
$5.50
Tolls Up In Real Terms: 30%+Traffic Up: 80%+
[28]The Corridor Effect
The corridor effect can generate exceptional growth on some toll roads.
Corridor: 2.7%; free -0.1%; plaza +7.7%*At the main toll plaza•Source: RTA; Interlink Roads
M5 Traffic Corridor
-
25,000
50,000
75,000
100,000
125,000
150,000
175,000
1987 1989 1991 1993 1996 1999 2002 2005
Ave
. Dai
ly T
raffi
c
Hume Highway Canterbury Rd M5*
[29]M5 Toll Road – Daily Traffic PatternThe M5 exhibits the typical pattern of traffic growth through to Friday.
M5 Tollroad Daily Traffic
60,000
70,000
80,000
90,000
100,000
110,000
120,000
130,000
140,000
Monday, 11December 2006
Tuesday, 12December 2006
Wednesday, 13December 2006
Thursday, 14December 2006
Friday, 15December 2006
Saturday, 16December 2006
Sunday, 17December 2006
Cars Trucks
12%Source: Interlink Roads Pty Limited
[30]ConnectEast – Daily Traffic Pattern
ConnectEast in Melbourne exhibits the same week day traffic pattern.
ConnectEast Daily Traffic Profile
-
50,000
100,000
150,000
200,000
250,000
Monday Tuesday Wednesday Thursday Friday Saturday Sunday
Cars Trucks
13%Source: ConnectEast Group
[31]The 407ETR Toronto Canada
407ETR Toronto Daily Traffic Pattern
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
Monday, 1December 2008
Tuesday, 2December 2008
Wednesday, 3December 2008
Thursday, 4December 2008
Friday, 5December 2008
Saturday, 6December 2008
Sunday, 7December 2008
The 407ETR in Toronto Canada also exhibits the same weekday pattern.
15%Source: 407 International Inc
[32]M6Toll Road – Daily Traffic PatternThe M6toll, a bypass road of Birmingham in the UK, exhibits the same weekday pattern.
M6Toll Birmingham Daily Traffic Pattern
-
10,000
20,000
30,000
40,000
50,000
60,000
Monday, 5November 2007
Tuesday, 6November 2007
Wednesday, 7November 2007
Thursday, 8November 2007
Friday, 9November 2007
Saturday, 10November 2007
Sunday, 11November 2007
11%Source: Macquarie Infrastructure Group
[33]Toll Road Revenue GrowthThe Australian toll roads have enjoyed continued revenue growth over the past 6 years.
Source: Transurban Group
Australian Toll Roads - Revenue Index from 2004 to 2010
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
2004 2005 2006 2007 2008 2009 2010
Hills Motorway (M2) CityLink Eastern Distributor M5 Sydney
[34]Toll Road Revenue GrowthInternational roads have enjoyed continued revenue growth over the past 6 years.
Source: Annual accounts for 407etr, Atlantia, APRR, Brisa and SANEF
Toll Roads - Revenue Index from 2004 to 2010
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
2004 2005 2006 2007 2008 2009 2010
407ETR ATLANTIA BRISA APRR SANEF
[35]Toll Road Example – 407ETROver the last 10 years the 407ETR in Toronto Canada has increased tolls by an average of 10% pa while traffic has grown at an average of 5% pa.
Source: 407ETR International
407ETR Financial Performance
C$0m
C$100m
C$200m
C$300m
C$400m
C$500m
C$600m
C$700m
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Expenses
Revenue
15% CAGR in EBITDA
[36]Toll Road Example - AtlantiaAtlantia has historically enjoyed stable traffic growth and high EBITDA margins even during the worst of the recent recession.
* Atlantia operates 70% of the Italian motorway system
Source: Atlantia
Atlantia Financial Performance
€0m
€500m
€1,000m
€1,500m
€2,000m
€2,500m
€3,000m
€3,500m
€4,000m
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Revenue
Expenses
8% CAGR in EBITDA
[37]Airport Fundamentals
• Airside operations are effectively regulated
• Spend per passenger on retail and car parking drives growth
– But underpinned by minimum rent guarantees
• Passenger growth driven by:
– Increased wealth
– Falling real air fares
– Low cost airlines
– Deregulation of routes
An airport is like a regulated utility attached to a Westfield shopping centre with an expensive car park.
[38]Airport Passenger GrowthOver the long-term, passenger traffic has demonstrated resilience to economic conditions & has grown at a significant multiple to GDP.
Source: IATA, MAP Group
[39]
Airports - Average Passenger Growth(includes Auckland, Brussels, Copenhagen, Frankfurt, Heathrow, Paris, Sydney and Zurich)
-15%
-10%
-5%
0%
5%
10%
15%
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
But Airport Traffic is Impacted by ShocksThe global financial crisis had a material impact on air travel.
Source: Auckland International Airport, MAP Group, Fraport, BAA, Aeroports de Paris, Flughafen Zuerich
Eyjafjallajokull Impact
(Iceland Volcano)
[40]Own the Airport Not the AirlineDespite passengers numbers declining, the financial performance of airports has been robust under difficult economic conditions.
Airport - Revenue and EBITDA Index (2003 to 2010)(includes Auckland, Brussels, Copenhagen, Frankfurt, Heathrow, Paris, Sydney and Zurich)
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
1.80
2003 2004 2005 2006 2007 2008 2009 2010
Revenue Index EBITDA Index
Source: Auckland International Airport, MAP Group, Fraport, BAA, Aeroports de Paris, Flughafen Zuerich
[41]Capital Markets Remained Open Thru the GFC
Company Location Amount Term Yrs Rate Timing
407ETR Canada C$0.55bn 3 4.50% January 2008
Consolidated Edison USA $1.2bn 10 & 30 5.85% May 2008
Atlantia Italy €1.0bn 15.5 2.90% Nov 2008
Fraport Germany €0.8bn 10 5.25% Sept 2009
Atlantia Italy €1.0bn 13 2.75% Dec 2009
Red Electrica Spain €0.5bn 6 3.50% October 2010
Terna Italy €1.25bn 10 4.75% March 2011
Terna Italy €0.35bn 20 2.35% July 2011
Source: Underlying companies
High quality infrastructure assets raised significant debt through the depths of the credit market crisis – and continue to do so at cheap prices.
[42]Infrastructure / Equities / Property
Infrastructure returns uses Magellan Infrastructure Beta Fund Index, Global Equities is MSCI Developed Gross Total Return Index; Global Property is UBS Global Property Investors Index
Asset Class Total Return (% pa) Standard Deviation
3 Yrs 10 Yrs 3 Yrs 10 Yrs
Infrastructure 8.7% 9.9% 12.6% 10.7%
Global Equities 0.6% 2.3% 19.7% 15.4%
Global Property 3.4% 9.2% 29.7% 19.5%
Infrastructure offers very different and much more defensive characteristics than either equities or listed property.
Periods ending 30 June 2011
[43]Conclusion
• Properly defined, infrastructure assets should provide:
– Robust earnings through the economic cycle; and
– Strong linkage of earnings to inflation.
• Over the longer term, the asset class should return around CPI + 5%.
[44]
This presentation (‘Presentation’) has been produced by Magellan Asset Management Limited (‘Magellan’) ABN 31 120 593 946, AFS Licence No 304 301 and has been prepared for informational and discussion purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any security or financial product or service. Any such offer or solicitation shall be made only pursuant to a Product Disclosure Statement, Information Memorandum or other offer document (collectively ‘Offer Document’) relating to a Magellan financial product or service.
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