RARE Infrastructure as at May 2013 1. Norfolk Southern Company (NSC US): Market Capitalisation US$20b NSC owns a rail network on the east coast of the US. NSC serves a diverse customer base, and moves a vast array of goods. NSC has a relatively high (Appalachia) coal exposure. The reasons we like NSC: Weak US economy and concerns regarding the outlook for the coal sector have led to an attractive IRR Rails exhibit pricing power (CPI + price growth) Volumes are cyclical, NSC is positioned to benefit from any US economic recovery Particular strength in intermodal segment going forward as market share is captured from trucks Margins have been growing (and returns improving), and guidance is for further improvement 2. CSX: Market Capitalisation $21.9bn CSX owns a rail network stretching 21,000 miles on the east coast of the United States. Volumes are cyclical and CSX has a high GDP exposure; while prices are set within regulatory constraints. Concerns regarding the outlook for the coal sector have led to share price declines and an attractive entry point for this stock. The reasons we like CSX: Exposure to US economic/housing recovery Coal faces headwinds but will continue to contribute to the US fuel mix, and will be supported by the export market Strong short term volume and price gains for non-coal Intermodal revenue growth will be strong as rail captures market share from trucking Continued improvement is expected in aggregate earnings margins over the medium term 3. TransCanada(TRP): Market Capitalisation US$60.4b TransCanada operates natural gas and oil pipelines in Canada and the US. It also has interests in several power stations in the US and Canada. The company is investing in its pipelines from the oil sands in Alberta to the refineries in the US. Regulated pipelines offering stable long term take or pay contracts Opportunities to leverage off its size and expertise to build extra pipelines Is in pole position to build the Alaska gas pipeline- projected cost circa $30bn
Exposed to attractive power markets with declining reserve margins Has low cost nuclear exposure through the Bruce nuclear facility in Canada 4. Pennon Group: Market Capitalisation US$3.5b Pennon Group has two main business divisions: South West Water and Viridor Waste: South West Water is the smallest of the 12 water and sewerage companies in England & Wales by regulatory capital value (under 3bn cf > 6.5bn for SVT, UU and Thames). It serves Devon, Cornwall and parts of Dorset and Somerset. This is the main business, contributing around 73% of 2011/12 group EBITDA. It serves an area of 10,300 km2, a population of 1.67m with 15,100 km water distribution mains, 645 waste water treatment works, and 14,700km sewers. It operates under a licence with indefinite length which gives it the right to operate in a defined geographical area. Compared to other WASCs, a lower proportion of its RCV is sewerage (57% vs 63% on average for the industry). Viridor Waste is a waste management company. It contributed around 27% of group EBITDA in 2011/12. It has five main segments: landfill (18% EBIT); recycling (27%); waste contracts (20%); collection, mainly local authorities (6%); power generation (20%). Viridor is expanding mainly electricity generation in waste to energy plants: it currently has 156MW capacity in operation, with an additional 129MW planned by 2014, and a further 120MW by 2016. This will increase waste capacity from 630 kt to 2870 kt. The company was first listed in 1989, when the UK government initially privatised the water & sewerage industry in England & Wales. Initially a pure water company, it has built up the waste management business by acquisition and organic growth. It changed its name from South West Water in 1997. Pennon s share price has come under pressure recently because of poor performance in the cyclical waste management business. The key value driver, however, is the investment in waste to energy plants which have attractive IRRs and in which Pennon has a competitive advantage. In addition, the asset value is backed by the regulatory asset value of the UK water business. Accordingly, we believe Pennon offers the prospect of attractive returns. 5. Vopak (VPK NA, full company name: Koninklijke Vopak N.V.): Market Capitalisation US$7.8b Vopak is the largest independent tank terminal operator in the world. Through subsidiaries, associates and joint ventures the company provides conditioned storage facilities for bulk liquids (such as oil products, gaseous chemicals, petrochemicals, biofuels, vegetable oils and Liquefied Natural Gas). The reasons we like Vopak, and why it has defensive characteristics are:
Management has a good record of earning returns that are higher than their cost of capital, and improving margins significantly since it was split-out from a chemical distribution business in 2002. A large majority of revenues are derived from rental payments (about 85%) for making capacity available to customers, which smooths cashflows compared to actual oil/chemical volumes. Vopak has 5.2 million cubic metres of volume growth in their investment pipeline from 2012 to 2015 (organic expansions plus greenfield plant operations - where they sign contracts with foundation clients). Storage capacity growth is being driven by structural factors, such as the imbalance between where petrochemicals are produced and where they are consumed. They are using their under-geared balance sheet to grow the business, and are well within debt covenants (2.4 times Net senior debt/ebitda, compared to a maximum of 3.75 times). With 84 terminals in 31 countries, the volatility in operating cashflows is low. Two thirds of operating earnings are from outside Europe, and the company benefits from a lower euro. 6. Snam SpA (SRG): Market Capitalisation US$16.1 billion Snam is the primary owner and operator of gas infrastructure in Italy. The vast majority of its assets are in the national gas transmission network, gas distribution concessions across the country and natural gas storage sites. These assets receive regulated revenues, and are monopolies in the areas in which they operate. RARE established a meaningful position in the stock because: There has been recent downwards pressure on the share price, caused by uncertainty surrounding the on-going regulatory reviews and a placement of Snam shares by previous major shareholder ENI (resulting in the stock trading at a discount to Regulated Asset Base, and creating an attractive entry point for RARE). RARE s valuation of the Company shows a 5 year Internal Rate of Return (IRR) of almost 12% per annum, including a dividend yield of approximately 7% per annum. Snam currently enjoys EBITDA margins of 77%, aiming to increase this to 80% by 2016 according to their 2013-2016 Strategic Plan. Snam s capital expenditure plans are supported by the government energy strategy, which aims to develop Italy as a gas hub into Europe. The company refinanced all of its debt in 2012. The demand for Snam s bonds and the tightness of its spreads has been impressive (re-pricing of bank debt will lower interest costs in 2013). RARE considers that the regulatory reviews for transport & distribution contain minimal risks to asset valuation. These are expected to be finalised by late 2013, and will start in January 2014.
RARE is very familiar with Snam s operations and management, having previously owned the stock at various times over the last 6 years as well as meeting with management at their head office in Milan and on several other occasions. 7. Transurban Group (TCL): Market Capitalisation AU$7.5b Transurban Group is a toll road owner and operator with interests in Australia and the United States. It has an ownership stake in eight roads (five in Sydney, one in Melbourne and two in Virginia in the United States). The group has a diversified mix of asset lifecycle stages with a number of mature intra-urban Australian toll roads providing strong free cash growth. The reasons we like Transurban: Inflation protection is strong Toll price escalation at or above inflation for Australian assets CPI toll price escalation stipulated by concession deeds Proven traffic growth Improving cost management Organic growth pipeline in place, including network enhancements A focus on maximising cashflows from existing assets, while remaining open to value accretive opportunities A disciplined and proven investment appraisal process 8. Fraport: Market Capitalisation US $4.9bn Fraport owns and operates Germany s biggest hub airport at Frankfurt. It also owns and operates other airports around the world. Frankfurt is in the top 10 airports in the world for passenger and cargo volumes. It has a strong home carrier in Lufthansa. The airport is owned on freehold and operates within a dual-till regulatory regime. The reasons we like Fraport are: Major hub airport with a strong home carrier and hub for the Star Alliance network Large catchment area with 47% of the German population (38m) living within a radius of 200km around Frankfurt Airport Excess runway capacity to cater for future passenger growth with limited capital investment following the opening of the new fourth runway at the end of 2011 Frankfurt Airport s retail offering has been significantly improved after years of being under-retailed and poorly configured
The airport is operated under a dual-till regulatory framework, which allows for excess returns in the unregulated non-aeronautical operations A disciplined and proven investment appraisal process with a proven strong track record in overseas airport investments 9. DP World: Market Capitalisation US$10.8b DP World is a global stevedore and port operator. It operates over 60 terminals across six continents, with container handling generating around 80% of its revenue. DP World currently has 11 new developments and major expansions underway in nine countries. DP World is an attractive investment opportunity as we expect: Pricing power to be maintained by the company (it does not have to be monopolistic pricing power as it is generally shared between the stevedores, shipping companies and the port owners such as governments) Continued execution on its strategy of operating and investing in assets with high returns on capital (or potential for high returns) Continued streamlining of operations (divestment of lower return and non-core businesses) Focus on organic growth following capacity expansion at its most important asset, Jebel Ali in the UAE Competition (e.g. Abu Dhabi's Port Khalifa) to remain rational and not fight aggressively on price and volumes Free cashflow and distributions to increase in line with strategy and guidance, supported by low growth capital expenditure requirements and operating leverage Excess returns are expected from: Continued ramp up of early stage (new) port operations Higher returns from emerging market assets (usually lower capital expenditure and operating costs) Customer retention (shipping companies) with a high quality service offering, including a global service offering 10. Crown Castle: Market Cap $19.2bn With about 30,000 towers, Crown Castle is the largest wireless infrastructure operator in United States. The shared wireless infrastructure includes towers and other structures such as rooftops, distributed antenna systems and interests in land under wireless towers. The business involves renting of antenna space on towers including co-locating tenants under long term contracts. The company also owns about 1600 towers in Australia.
US wireless carriers are upgrading to 4G and so increasing the capital expenditure on Towers. Crown Castle has the largest number of Towers in the US and is likely to be a prime beneficiary of 4G upgrade. Tenancy ratios could rise due to its urban Portfolio and boosting its profits. Tower business model is also predictable and stable with long term contracts, inflation protection, and minimal capital expenditure. Likely to convert to REIT in 2015 and valuation is also attractive.