Chasing Infrastructure And Utilities For Yield

This story features TRANSURBAN GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TCL

– Brokers favour Infrastructure and Utilities for yield
– Transurban well liked, Aurizon and Qube also feature
– Goldman Sachs has four rules of thumb for picking yield plays
– UBS likes Origin best

By Andrew Nelson

The "chasing yield" theme carried on in a healthy fashion through April. For the most part, investors chased Infrastructure and Utilities plays, seeing a number of stocks from both spaces outperform the broader market over last month.

This has continued to play out despite declining yields (yields fall as prices rise). A basket of stocks comprised of Transurban ((TCL)), Sydney Airport ((SYD)), DUET ((DUE)), Spark Infrastructure ((SKI)), SP Ausnet ((SPN) and APA ((APA)) have seen yields pull back to 6.2% from 7.5% over the past year, reports BA-Merrill Lynch.

The broker also points out that the best piece of evidence for this sustained level of yield appetite is Envestra ((ENV)) and its share placement last month. The company was hoping to pick up $100m and ended up walking away oversubscribed, pocketing some $130m.

Transurban disappointed at last month’s AGM, revealing the total cost of the M2 project was going to come in $90m, or 16% higher because of scope increases. Despite this seemingly unfavourable news, especially given the current capex-paranoid world, the share price nonetheless pushed higher.

Now what could convince investors in such a capital heavy company to buy more shares when a major project is not running to plan? Simple. All that was needed was the reiteration of the dividend growth story. The broker estimates TCL’s div will post an average of around 9% per year growth for the next five years.

There was some good earnings news to support the dividend story, so yield didn’t carry the load alone. The company also still expects the M2 widening to generate 16% traffic uplift, while March quarter traffic was good enough. CityLink traffic was up 2.6% and a little ahead of Merrills' forecast, while M2 traffic was up 2.5%, although still short of Merrills' 3.5%. All up, the broker expects to see good growth, driven by steady increases in traffic and tolls.

The broker reports most stocks in the sector actually still boast decent growth prospects over the next 3-years. Asciano ((AIO)) is expected to benefit from new grain and coal contracts. There’s a bit less certainty with Aurizon ((AZJ)), as growth needs to be supported by contract re-pricing and capex on regulated networks.

The broker likes Spark Infrastructure and SP Ausnet ((SPN)) amongst the regulated utilities given some fairly attractive multiples, while APA Group is simply too expensive. All up, however, BA-Merrill Lynch expects Transurban, Aurizon and Qube Logistics ((QUB)) to enjoy the strongest 5-year average earnings growth and if you add in Asciano, you’ve got the stocks the broker thinks are offering the best value in the market as well.

Goldman Sachs also had a look at the yield theme playing out in the infrastructure and utilities sector to try to get a handle on the factors that have historically been the best indicators of future risk-adjusted returns. The broker had three key pieces of advice to impart after looking at the numbers from FY00-12.

The first piece of advice is that valuation-based stock selection tends to work. The broker had fourteen data points that it compared and eleven indicated a positive alpha curve over the period. What’s more, many of those metrics that did generate a positive return actually booked compound returns of better than 10% per year.

The next thing the broker noticed was that picking stocks based on distribution yield combined with growth historically generated ever stronger risk-adjusted performance. The broker notes this method yielded compounded average returns of better than 23% a year for the top 25% of stocks and a negative 4% for the bottom quartile of stocks.

The last lesson the broker wanted to impart was that stock selection based on price to discounted cash flow, free cash flow yield and cash return on capital invested tended to generate strong risk adjusted returns.

Across the infrastructure and utilities sector, Goldman Sachs notes Spark Infrastructure and Sydney Airport offer the highest dividend yields. Spark, Australian Infrastructure ((AIX)) and Transurban offer the best forecast dividend per share (DPS) growth on current estimates.

UBS also thinks the utilities make for good choices for yield focused investors, with network utilities offering some of highest yields in the market. The broker notes Origin Energy ((ORG)) and Envestra offer some of the highest total returns.

The broker has broken down the utilities into two groups. The first it calls the high DPS growth average yield basket. These stocks include Origin, Transurban, Envestra and Sydney Airport. The second group has offered what UBS calls a “turbo yield”, while still regularly offering normal DPS growth. These stocks include Spark Infrastructure, SP Ausnet, DUET, Stockland ((SGP)) and CFS Retail ((CFX)).

UBS’ top pick, however, is Origin, which, although the broker points out DUET’S 6.8% yield is also quite attractive and DPS coverage near term is solid compared to peers.
 

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