Long Rates Vs. Utilities-Like Assets

Sure enough, peaking long rates are exacting a performance toll from Utilities and Infrastructure type stocks. The first group capitulated by late July. Infra, largely an AI dream these days, suffered as early as late June when doubts engulfed US equities and their AI proxies. This is what the following performance chart is telling us.



There is no avoiding the hit of higher risk-free rates on businesses built on certain cash flows and associated stretched balance sheets. ‘Certain FCF’ is a relative concept though. It weakened a lot as far as Utilities are concerned as they have been pushed by EC regulators into the competitive arena. 

As far as Infra stocks are concerned, ‘certain FCF’ is an oxymoron when it comes to AI data centres. So the hit to valuation is a combination of a traditional hit on the liabilities side compounded by a hit on the asset side (eventually worthless data centres?). If the financing of US data centres stalls owing to unaffordable higher rates, the picture is bound to be ugly.

 

Within AlphaValue Infrastructure coverage, ACS and Vinci are the main declared data-centre players. It is not the issue of an ADP or Getlink of course.

Similarly, not all Utilities are stretched to the hilt as part of their business model of turning unappealing ROCE into shiny ROEs.

We have cleaned our Utilities + Infrastructure coverage to only keep the most exposed business models to higher rates, and used the following chart plotting last month's performance vs. debt/ebitda ratios.

The reading is quite clear. Strong regulated business models (yellow circle) hardly budged whatever their gearing, the ultimate resilient play being United Utilities.

At the other extreme, businesses ‘in transit’ à la ACS (blue circle), have been sent to the cleaners, even though their gearing is nominally limited. ACS is indeed trying its luck with data centres, Centrica is over exposed to retail balking at higher energy bills, Orsted has to consolidate around lower growth ambitions, and Acciona has become too dependent on its controlling stake in Nordex to be a clean green energy case.

Gearing vs. 1-month performance: Utilities & Infra stocks