VALUE.ABLEA Roger Montgomery
Prices as at close of business, 12-Apr-17.Risinginterestratesareanextrathreattooverpricedroadandairportstocks
SECTOR INFRASTRUCTURE
Gravity will take its toll
ASX codeTCL
Price $11.97
52wk▲$12.65
52wk▼$9.45
Mkt cap $24bn
Dividend 48¢
Dividend yield 4%
PE ratio 193■SELL
ASX codeSYD
Price $6.95
52wk▲$7.62
52wk▼$5.80
Mkt cap $15bn
Dividend 31¢
Dividend yield 4.5%
PE ratio 48■SELL
❸Auckland Interna-
tional Airport
AIA owns Auckland Air-
port and a major stake in
Queenstown Airport. As
we have said previously,
and metaphorically, Auck-
land and Queenstown air-
ports are geographically
locatedonvacantblocks
at the end of a global
cul-de-sac and we don’t
understand how their location can possibly
justify them being in the top five most expen-
sive airports listed on any stockmarket in the
world. Bond rates will eventually rise – they
already are – and AIA’s price should decline,
unless its earnings can grow at rates faster
than have been experienced historically.ASX code AIA
Price $6.13
52wk▲$7.59
52wk▼$5.48
Mkt cap $7bn
Dividend $1.78
Dividend yield 2.9%
PE ratio 30■SELL
the very near term. Indeed, initially the
market will see higher rates as a sign of
economic recovery and growth, which are
generally positive influences on the profits
of companies. But if rates keep rising the
negative impact on the present values of
future cash flows will overwhelm the bene-
fit of growth and press asset prices lower –
much as gravity brings us all back to earth.W
hen we visited the infrastructure
sector back in 2016, we declared
many of the stocks to be over-
priced. They later declined by between 10%
and almost 20% before recovering to be
virtually unchanged. So what has changed?
It remains the case that sitting down
at a dinner party and stating you own a
toll road like Sydney’s M2 will get jaws
dropping and tongues wagging. There is no
question that owning a piece of essential
infrastructure will elicit all the responses
experienced by monopolists. In the absence
of regulation or taxation by federal, state or
local governments, infrastructure owners
can charge what they like thanks to the
often inelastic demand for its use. And
when legislation at the time of the sale of
the infrastructure, or before permits are
granted for its construction, is inadequate,
owners are subject to a barrage of inquiry
and investigation.
Nevertheless, the benefits of ownership
of the hard assets on the balance sheets of
Sydney Airport, Auckland Airport, Tran-
surban and utility companies like Origin
Energy, DUET Group and AGL Energy are
the inflation-protected revenues, as well as
some immunity from economic fluctua-
tions and the business cycle.
But what has materially changed since
we last wrote about this sector in 2016 is
that expectations of inflation have emerged
globally and Donald Trump has accelerated
that sentiment. Long bond interest rates are
now rising. Evidence of this is best illustrat-
edintheUS10-yearTreasuryrate,which
inJulylastyearwasjust1.36%–thelowest
since before 1773. Today that bond rate is
2.40%.Theimpactofthisshiftinratesand
inflationary expectations won’t be felt inal Airport$7.00$6.50$6.00$$6.50$6.00$5.50Transurban
$12.50$12.00$11.50$11.00$10.50$10.00$9.50
MJ SNJM MJ SN JM MJ SNJMp
Auckland Internation
$8.0 0$7 00Sydney Airport
$8.0 0$7.5 0$7.00❶ Transurban
Transurban’s share price
has bounced back to
where it was when last
reviewed, after initially
declining. Given the
longer-term outlook
remains unchanged, so
does the view. It is the
owner or majority owner
of some enviable assets
(including the CityLink
toll road in Melbourne, the Hills M2, Lane Cove
Tunnel, M5 South-West, Westlink M7 and
Cross City Tunnel in Sydney and the Gateway
Motorway, Logan Motorway and Clem Jones
Tunnel in Brisbane) but income streams
may not grow as quickly as rates could rise,
suggesting the best is in the near-term past.
❷ Sydney Airport
Sydney Airport is regularly
in the spotlight thanks to
its reportedly egregious
charges for car parking.
But these form only a
small part of total revenue- albeit a large contributor
to profit margins! The
company also receives
revenue from charging
airlines to dock their
aircraft and for each passenger they carry
(more than 100,000 travellers daily) and also
charges retailers a lease for their stores and
transport operators for ferrying passengers.
None of its monopoly powers justify it being
one of, if not the most, expensive airport
listed on any stockmarket in the world.
Roger Montgomery is the founder and
CIO at The Montgomery Fund. For his book,
Value.Able, see rogermontgomery.com.