July 29, 2009
Transport Infrastructure
It’s What’s Inside That
Counts
Assets are key, not asset class. We have examined
historical (relative) share price performance, valuation
and business characteristics of motorways, ports and
airports: 1) to understand the best macro conditions for
share price performance of each segment; and 2) to
provide investors with a primer of the different business
models across the infrastructure sector.
We come to four main conclusions. (1) Individual
asset characteristics count more than asset class. (2)
High earnings multiples are justified. Maintenance
capex is usually substantially lower than depreciation,
leading to very high cash conversion; this, together with
resilient volumes and price power, justifies high earnings
multiples. (3) Recent changes in inflation expectations
also show that real interest rates are a key driver of
relative share price performance, not nominal rates. (4)
Above-average financial leverage is here to stay.
Which are the best stocks to own, and when? We
explore macro scenarios based on high/low GDP and
inflation to identify which are the best of the three asset
classes to own – motorways, ports or airports – and,
within that, which stocks offer the best risk-reward.
• Abertis, NCSP, HHLA and Atlantia emerge as
most attractive under our base case of no GDP
recovery until 2011 and medium inflation.
• HHLA, Atlantia, ADP, Fraport and Ferrovial
appear most attractive under our bull case of
GDP recovery as early as 2010 and high inflation.
• Abertis and NCSP are most attractive under our
bear case of lower than expected or deteriorating
GDP growth in 2010 and medium or low inflation.