Infrastructure sector set to boom

The infrastructure sector could double in size over the next three to five years, says Macquarie Equities infrastructure analyst Jon Fitch.

The infrastructure sector could double in size over the next three to five years, says Macquarie Equities infrastructure analyst Jon Fitch.

He believes that this could happen on the back of further privatisations and as already privatised assets list on the Australian Stock Exchange.

He says the infrastructure sector currently makes up about 2 per cent of the All Ordi-naries Index and is capitalised at $9 billion.

It has also shown rapid growth since its start in late 1996, when it only had three listed stocks with a market capitalisation of $3 billion.

Fitch says: “This is a new sector which I believe is not widely understood yet. A lot of its assets have only been on the market for a few years and many people are only just getting to look at them.”

The sector offers diversified exposure to roads, rail, airports, seaports, electricity, telecommunications, water treatment, natural gas, hospitals and stadiums.

Among the companies listed in the sector are AGL, Hills Motorway, Infratil Austra-lia, Macquarie Infrastructure and Transurban.

Infrastructure assets, many of which were previously held in the public sector, tend to be monopolistic in nature. And some, like toll roads, have highly predictable and sta-ble income streams. Many also have fixed cost bases, which means that any rise in income feeds straight through to the bottom line.

Many are also in differing stages of development - from greenfields to the more ma-ture — offering a spread of risk profiles.

In addition, the sector is viewed as a good inflation hedge with many of its assets guaranteed inflation-linked price increases by their regulators or in their concession contracts.

BT senior vice president Greg Goodsell believes that because the sector is tied to the country’s infrastructural development, its fate is closely correlated to GDP growth.

He notes, however, that the sector’s utilities have suffered lately because of rising competition from new foreign entries into their markets and, more so, because of un-certainties surrounding their regulatory environment.

Roads, which do not have a regulator, have fared better. “We know the conditions under which they operate with the state,” Goodsell says.

Jon Fitch is an infrastructure analyst with Macquarie Equities.