Massive Federal Government stimulus is why investors should consider buying infrastructure/ construction and engineering stocks, according to Andrew Inglis, of Shadforth Financial Group.
Inglis says the Federal Government has earmarked about $35 billion for infrastructure projects during the next eight years. This amount excludes sizeable state government and private sector contributions. Projects include building a national broadband network, completing a national energy grid and extending the national rail freight network. Also included is new infrastructure to secure water supplies, upgrades of ports, airports and roads and upgrading public transport systems in major cities. His portfolio isn’t a recommendation to buy, but it consists of companies he believes will benefit from infrastructure projects over the longer term.
Inglis says Leighton Holdings has the skills and experience to win its fair share of government projects as part of consortiums. Recent examples of contract wins include building a $3.5 billion Victorian desalination plant before operating it over 30 years, an $8 billion electricity upgrade in Sydney, the Hunter Valley and NSW central coast and numerous road contracts, including the $4.1 billion Airport Link in Brisbane. “Leighton has an excellent track record of being able to deliver large infrastructure projects on time and budget,” he says.
Engineering services company WorleyParsons is a leading international player in the infrastructure, power, oil and gas sectors. WorleyParsons has 105 offices in 34 countries. It’s involved in building Egypt’s first nuclear power plants in a deal expected to generate $US160 million over eight years. Australian Government initiatives to spend $3.5 billion on solar power plants are broadly based on Worley’s propositions, says Inglis, who expects the company to be a major beneficiary. Recent contract wins include Worley as part of a consortium to build the Perth desalination plant and managing the multi billion dollar Oakajee port/rail project in Western Australia.
Inglis says before choosing infrastructure and engineering stocks, he closely examines company management and past performance. Because these companies often deal in billion dollar contracts involving long-term projects, there can be a fine line between making a good profit, or turning a loss. Inglis says investors can benefit from buying companies that not only build the infrastructure, but operate and maintain them over the long term.
Origin Energy will benefit from a Federal Government objective to integrate the national energy market, Inglis says. It will be able to supply a national market and take advantage of fluctuating supply and demand opportunities with their vertically integrated business model. Origin offers a strong balance sheet of $1.7 billion in cash and is a leading contender to buy NSW Government power assets. Origin offers a 10-year pipeline of growth projects, particularly in Queensland LNG. “Origin will also benefit from the introduction of a carbon trading system with its renewable and modern gas fired power generation capacity,” Inglis says.
The share price of Transfield Services has staged a partial recovery after it nose-dived from a high above $11 in November 2007 to $1.24 in December 2008. It closed at $4.11 a share on October 6, 2009, and Inglis says the long-term outlook appears much brighter. He says Transfield was recently awarded contracts to build and maintain 60,000 NSW Government homes. Another deal includes rolling out broadband for Telecom Corporation of New Zealand worth NZ$1 billion over 10 years. “Transfield is also well placed to benefit from the Australian NBN, rail, water and power infrastructure projects,” Inglis says. “It mostly operates in long-term alliance contracts to build, operate and maintain infrastructure on behalf of its clients.”
Inglis says investors benefit from quality management with a proven history of successfully assessing risk. Engineering companies must get the tendering process right - not only to win contracts, but to ensure healthy margins. Too many companies have posted losses on projects over the years because of cost blowouts. Engineering companies are also exposed to the performance of global economies, where projects can be cancelled, reduced or put on hold because of a bleak economic outlook. The challenge for infrastructure companies is adequately managing gearing levels appropriate to the value and projected returns of their assets. And Inglis warns: “There’s no point investing in a toll road that motorists go out of their way to avoid.”
However, Inglis says tollway operator Transurban Group is a stock investors should consider buying, particularly under new chief executive Chris Lynch, a former senior executive at BHP Billiton. Inglis says Transurban offers a high quality road network in Melbourne, Sydney and Washington D.C. The company has refocused on its core business by cutting operating costs, reducing dividends to sustainable levels and extending finance facilities on more attractive terms. He says Transurban will benefit from long-term government spending programs to upgrade road infrastructure, such as Melbourne City Link amid proposals to widen the M2 and M5 toll roads in Sydney.
Inglis says quality infrastructure and engineering stocks tend to do well on brighter economic prospects. Share prices have partially recovered this year in line with an improving global outlook amid governments committed to big stimulus programs to protect employment. Inglis is seeking capital growth in building his portfolio, but says he factored dividend yield and franking into his choices. He says stocks in his portfolio yield between 3 and 7 per cent.
In providing construction, operation and maintenance services to the telecommunications (core business) and public utility sectors, Service Stream should gain significant business from the NBN rollout as one of only three companies with specialised expertise in this sector. It has also diversified into providing electricity, gas and water metering services to utilities. Inglis says Service Stream recently appointed a new CEO (Graeme Sumner) with good credentials and has undertaken a capital raising to strengthen its balance sheet. “This is a more speculative opportunity in a smaller growth company with some volatility in revenues,” Inglis says
Programmed Maintenance Services provides long-term maintenance to 60,000 buildings in Australasia and the UK. It’s a market leader in servicing schools and public housing. “With large amounts of government money being spent in these areas, PRG will be a long term beneficiary,” Inglis says. “In addition, it has a substantial blue collar labour hire business, which will be in strong demand for some years due to the high level of infrastructure spending.”
Adelaide Brighton is Australia’s leading cement and lime producer and its products are widely used in residential, commercial building and infrastructure projects. Inglis expects the company to benefit from a housing recovery, and from government infrastructure projects involving roads, rail, bridges, energy, ports, rail and water.
Company
ASX Code
Activity
Share Price Close
23 Oct 2009
Leighton Holdings
LEI
Project development $37.65
WorleyParsons
WOR
Engineering services
$29.04
Origin Energy
ORG
Energy provider
$16.48
Transfield Services
TSE
Maintenance Services
$4.68
Transurban Group
TCL
Toll road operator
$4.41
Service Steam
SSM
Infrastructure services
$0.44
Programmed Maintenance Services
PRG
Project services
$4.54
Adelaide Brighton
ABC
Cement maker
$2.96
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SSM Price at posting:
37.7¢ Sentiment: LT Buy Disclosure: Held
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