Infra stocks are simpler than Infra funds

Let's take a long-term view of Infrastructure stocks, the newish sector to encapsulate construction as well as concessions businesses. Over the last 5 years, inflation and thus interest rates have had no impact on the slope of their performance. The only issue is whether such a performance chart begins or not at the low of the Covid panic (March 2020). From the depth of March 2020, Infrastructure stocks performed as well as the Stoxx600 index.

Infrastructure stocks suffered more from Covid than from interest rates

The sector recently suffered from French political uncertainty as the incoming government (a Prime minister has yet to be appointed) could be tempted to extract a few extra Euros from the French motorway concessions. That has weighed on Vinci which happens to be the sector's largest market cap.
The key word is Concessions. All construction stocks but for Royal BAM have seen the benefit of the repeat income attached to long-term concessions. As they tend to also be the construction/engineering companies behind the deployment of infrastructure concession assets, they know where the risks are meaning that their pricing would be expected to leave decent margins. This leaves the only risks on the political side with the occasional changes to the terms of concession contracts. Some countries (say Canada) are legally safer than others (say France), but the truth is that it is rather difficult to build up an ex ante consistent map of political risks. 
Infrastructure stocks should be about matching repeat concession cash flows with a lot of debt. This is not the case in real life. The following chart shows the steady contraction in the debt pool of the 9 stocks involved in Infrastructure, set next to the sector gearing. Net debt has effectively increased by €20bn from its 2017 nadir to the current €67bn but this increase is amply covered by the progression in Ebitda with a gearing ratio down to 2.7x Ebitda. This may explain why equity investors have not been that worried about interest rate rises.

Infra stocks net debt (red) vs. net debt/Ebitda (pink): very conservative indeed

The sector is not easily gauged on PE metrics. The average 16.2x for 2024 is one of these useless averages spanning a Ferrovial at 47x to a Royal BAM at 7x. Vinci, the biggest player, trades at less than 13x.

Infrastructure sector valuation essentials

As asset-heavy businesses (even though the assets are transient in the case of the French concessions), it may make more sense to look at infra stocks from the point of view of their price to book.

The following chart shows in pink the P/book of the Infra sector set against that of the market (in blue): in effect the Infra sector had a bout of weakness post the Great Financial Crisis but has recovered markedly since. The current P/Book at 2.6x is 37% higher than the market one with that premium being above the historical (18 years) average at 25%.

P/book for infra stocks (pink) vs. market P/Book (blue)

In effect Infra stocks seem to be fairly fully priced even though we see a combined 23% upside potential. This is confirmed by the lack of a significant discount to NAV at 13% on average. 

The real attraction of Infra stocks remains that they offer exposure to excellent infrastructure with low friction costs and total liquidity. As already mentioned in yesterday’s short paper on Vinci (to read more, reach to us at contact@alphavalue.eu), it makes a lot of sense to substitute listed assets for private ones in that corner of specialist investment. Listed infra stocks know their turf better than any infra fund managers and are just as able to diversify.