The Calm in the Storm: Finding Growth in Disruption

Next is Ben McVicar, co-head of infrastructure and portfolio manager at Magellan Investment Partners.

Ben has more than 15 years of investment experience and has spent over a decade shaping Magellan's global infrastructure strategies.

Today, he will explain why infrastructure investments provide stability while also capturing transformative growth in a disruptive market.

Welcome, Ben.

Thanks for having me.

So what I want to talk about today is a couple of things.

I want to talk about infrastructure and how it provides stability as an investment, as an asset.

And then I want to talk about some of the growth opportunities we see out there.

There's some big thematics out there at the moment.

And so if I kick off with what actually infrastructure represents to us.

So when you think about infrastructure, it should really do

couple of things in your portfolio.

And really what we're talking about here is infrastructure that is well-defined.

And so what do I mean by well-defined?

I'm talking about infrastructure that is very much in that

Part of the mix where it's delivering essential services into communities, why essential services?

Well, ultimately, delivering essential services means that you can be really confident as to what the demand is going to be for these assets throughout the economic cycle.

One thing that we take very seriously that we think any investor in infrastructure should take very seriously is thinking about how cash flow defensibility then comes out of that as well.

And so we really put a lot of thought into and a lot of time into trying to work out what are the big risk factors that can lead you astray in that process.

What we end up with is ultimately a set of assets that we think delivers these characteristics.

One is that they are highly defensive assets over time.

And so this is going to mean that these assets can weather a storm throughout an economic cycle, they can survive a period of duress.

Importantly, a lot of infrastructure assets are well inflation protected in terms of the underlying cash flows.

What I would remind is that we are very much talking about listed infrastructure.

So they're still listed securities.

So the share prices still do move around a bit.

but the underlying cash flows are very robust.

I think most would be familiar if you have toll roads in your city that you will have tolls that go up typically by inflation or a fixed number, so you've got good protection there.

And really important, which is some of the stuff I'll talk about today, is that you get very good structural growth that comes attached to these assets as well.

So what are the types of assets that we see out there in the infrastructure landscape?

Well, you can really break it up into a couple of different buckets.

One is assets that have utility service provision, what we call a broad category of transport infrastructure.

So think things like airports, motorways, and then social infrastructure.

Let me cover off social and social infrastructure very quick.

It is a very small part of listed markets these days.

There's a handful of companies you can see investable in that space.

However, utilities is all about regulated services.

So below the dotted lines are things that we think investors should be careful about straying into when they think about infrastructure.

And so it's things like water utilities, gas utilities, and these are very typically regulated franchise monopolies.

You have a very good protection on your capital.

Transport infrastructure, things like airports, typically contracted or regulated services.

Things like motorways, I think most people appreciate motorways operate under a long term contract that gives them very robust protection over time.

And so these are all these assets that we have above the dotted line.

very much fit into that lens for us of delivering essential services into communities, into economies.

And therefore, you can be really confident as to what they will do throughout the economic cycle in terms of the underlying business mix.

So we think this is a particularly attractive set of assets for investors to consider when you're looking for defensive assets, but also ones that can come with some real growth attached onto them.

And I'll touch on this some of the growth in just a moment.

So when we think about some of the growth, I think

Most people out there who have opened any newspaper in the last few years are well aware of the dominant theme of AI and how that's trending through markets.

Very much, you know, particularly in the United States, where you've got some major major investment themes, but it's happening globally.

What we are seeing in the infrastructure space is that there's very large investment needed to service these data centers that are being developed, primarily to provide the power.

And so what we have seen is, and these are just a couple of charts to really try to bring that point home to a degree here, which is that when you think about power consumption, these data centers are very power hungry.

And so you can see on the chart on the left hand side, which I think is a really good one for giving you a sense of

just how much demand has come through in the system.

You can see a couple of states in the US, Virginia, Texas, Oregon, you can see some of these states have had very big increases in their commercial electricity consumption.

Places like Virginia are very much known as the data center capital of the world.

You have a location where a lot of these data centers want the connectivity back into these key hubs and so there's a lot of demand to be in those areas.

But what's really interesting to us here is when we look at then the forecast load, this is coming out of some of the

that the US agencies, you can see the forecast for power loads coming out of data centers in terms of gigawatts being added to the system going forward.

And they are just enormous numbers.

So

Even if from here you can see some slowdown, right now that's not what we're seeing.

We're continuing to see very strong CapEx out of the hyperscalers cloud companies in the United States.

But even notwithstanding that, even if you get a slowdown, there's still a huge pipeline.

So what we see coming out of that and the opportunity in infrastructure to really leverage against that growth is these companies can basically provide the capacity, both the electric network capacity, the power generated capacity,

But if you recall what I was just saying before, a lot of the companies that we find attractive in this space, they are regulated businesses.

And so they have a set rate of return, they get strong defensibility in their earnings profile.

but you can tether yourself to this growth.

It's sort of a situation where you can get the growth, and it's not going to be exponential growth, it's just going to be steady growth each year.

But what you're going to find here is that if their market does turn, you've got underwritten capital, so you're protected.

And that's really important to us when we think about that defensibility for investors in infrastructure.

An example of a company in this space that we think is kind of interesting at the moment

I will just caveat to say, obviously, you know, this is one stock within a portfolio of companies we look at.

And obviously, this is always, what I would just hazard a comment here is to say that, you know, this is a very interesting company to us, but it fits within a portfolio as a key point.

But Alliant Energy, this is a Midwest-based utilities business.

What we think is kind of interesting about this business is they've had very strong penetration of data center loads into their service territory, as well as other commercial loads, I should add.

What you can see on the left-hand side is that they are looking at very strong expected growth in their peak electric demand in their service territory.

So the moment of maximum demand that they get throughout the year.

And you can see what's happened is over the forecast period, this company is saying they're already going to add 2.1 gigawatts.

So you're looking at very large growth in their load.

And what's really interesting to me about this is

over the weekend.

So literally, since we put the slide together, the company's already upgraded their guidance again, just to talk about the CapEx numbers.

So that 2.1 has already gone to three in their numbers, which is just phenomenal.

And they're now talking about an additional two to four gigawatts of data centers on top of that.

And so what that's meant is that you've now seen the CapEx for this company go up.

As a reminder, CapEx for these companies is actually a good thing.

CapEx is really what they drive their economic engine with.

And so what we've seen is on this business plan, the company already had a CapEx plan that had increased by 26% since basically the 18 months in the end of 2023.

And what we've just seen, as I said, they upgraded their guidance again over the weekend.

And what we've seen them do off the back of that is push that CapEx up again

up to about 13.4, 13.5 billion, so another 17% increase.

So it's a really strong growth thematic for what is a very safe and steady business.

And what that's resulted in is this company has an ability to increase its earnings over time.

So we think it's a pretty attractive story.

Now, I said I was going to touch on just a couple of growth avenues for these companies.

The other one I will mention briefly

before wrapping up is just renewable energies.

I think this is kind of interesting because renewable energy is obviously I would describe in recent years was hitting euphoria pitch in terms of the excitement if you go back a few years.

But what's really interesting to us as we look at this day in day out is that we continue to see the companies we look at in the utilities landscape still undertaking significant investment in this space.

And so we are seeing that, on the left-hand side, we've got a few quotes around what's been going on out there, and we can see very clearly, we know the Trump administration in the US has said a lot of derogatory comments about renewables, which from our perspective is just a source of power that can fit into the mix.

And likewise, in Australia, we're seeing some sort of negative news as to the trajectory of rollout of renewables.

But notwithstanding that, when you actually then look at the data,

You can see on the right-hand side the chart that shows the huge amount of growth that we're seeing in renewables.

We actually expect to be anything that's going to increase in the next few years.

We have seen some tax credits in the US come off.

And so what is potentially going to happen there is you're going to see a lot of rush of investment before it maybe levels for a few years and then keeps going up strongly.

So we see a very strong opportunity in renewables growth.

Why is that interesting?

Well, ultimately, what we see is a real opportunity for these companies, the utilities to invest and again under a regulated framework and to achieve a reasonable rate of return while really tethering themselves to that growth that we see out there.

So we think this is one of a couple of sort of call it thematic drivers of growth out there beyond all the usual growth dynamics that these companies would have.

And so with that, I was just trying to keep that fairly brief, but that's a quick overview of some of the opportunities that we're seeing out there in infrastructure.

Thank you very much for that, Ben.

I think it's fair to say the demand in energy consumption seems to be going through the roof in many, many, many, many regions.

Now, infrastructure, accordingly, has performed very well over the last 12 to 18 months as an asset class, as have equities in general and in the US in particular.

Are valuations becoming stretched, in your opinion?

Yeah, it's a fair question.

Because when we think about how we've certainly seen the fund that we run, you know, the 12 months to the end of September, we saw the fund up just a touch over 11%.

For the trailing three years, we're up over a bit of a 10% per annum after sort of fees.

So it's, it has been a strong period of time.

And I'm sort of saying those because generally infrastructure, you expect a

depending on inflation, call it a high single digit type rate of return.

So I think it's a fair question.

Have valuations gone beyond the reasonable point?

From our perspective, you can look at that a couple of different ways.

One is when we approach infrastructure valuations, we'll do a lot of detailed bottom up valuation work using discounted cash flow valuation models.

And then the other way you can look at it is probably from a higher level sort of market called market multiple versus history.

So on the first one, so our sort of bottom up work, what we very much see is that the market looks reasonable to us, not stretched, not on average, abundantly cheap.

But as usual, when you look at markets, you see opportunities where there's significant pockets of undervaluation, pockets of overvaluation.

And so we certainly see that the sector looks reasonable as a whole, but there's opportunity within that.

When you look at the time series, so to call it the multiple over time and how it's trended in infrastructure, it is difficult to use a simple multiple because of the business models and the accounting employed.

But what we can do is we can look at, say, the dividend yield.

What we have found, using a proxy for our Investable Universe, is that the dividend yield since about 2010, started 2010, has trended between three and a half and four and a half percent.

The average is about four.

And we're currently at that 3.8% level.

So, you know, a touch past that 4%, but still in our minds very much in the reasonable range for infrastructure.

So two sort of data points that

suggests it doesn't look stressed.

Now I think the missing piece of the puzzle they probably haven't mentioned here is if we were to roll back the camera to the middle of 2024, what you would find is that infrastructure looked very cheap to us, more like at that 4.5% band.

So some of what we've seen in the last few years in infrastructure has just been a catch up from what was fairly attractive valuations at that moment in time.

So fair to say opportunities abandon the market even if the market isn't per se cheap or expensive.

I think as an investor you always are going to find pockets of opportunity out there if you're looking hard enough.

Which kind of leads me to my next question, Ben.

In your buckets that you delineated the market into, if you were just to drill down a little bit into a bit more detail, in which of those segments or sectors do you particularly see the growth?

Is it motorways?

Is it airports?

Is it energy providers?

Where do you think those opportunities are?

Yeah, that's an interesting question and framing of it.

When you think about what we can see out there, I've talked a bit about the utilities bucket and how we see some good growth opportunity in the utilities bucket and that's actually, that's picking up.

So we see that's looking pretty attractive.

The thing that you don't want to overlook though is that the middle bucket, if you remember back, the transport infrastructure,

you know, we continue to see that, you know, that actually has some very strong growth assets attached.

I think most people would think about, say, motorways.

They think about how you've got population growth of one and a half, two percent per annum, depending on the city.

You get then maybe a bit of extra traffic growth.

You're talking about a couple percent traffic growth per annum.

So it feels fairly sluggish.

But what we actually find is on some of these really attractive motorways, and I'll call out an example for you to give a sense of this, is you can see some really strong growth dynamics play out because of the

exact specifics of that business.

So we've got an investment through another company, through a company for OVR, we hold an investment into the 4A7 ETR motorway in Toronto, Canada.

What's really interesting there is on our analysis since 2000, that road has grown by

2.6% per annum in terms of traffic.

Off the back of that, they have delivered revenue growth of about 9.6% per annum, and they have delivered EBITDA growth of about 10.8% growth with very high resultant margins that have come off the back of that.

I'm not trying to argue that that's every toll road out there.

You might find that the actual number sits somewhere between there and the sort of mid single digit numbers depending on the road.

But the point I'm really just trying to get across here is you get to the right assets, you get some real structural growth, i.e.

population employment growth in the growing city.

And then you multiply that with some of the contractual structures you've got.

You can get a really attractive outcome and growth outcome in a lot of the infrastructure assets out there if you select them well.

Well, I think that is the point right there, Ben, isn't it?

It's always about selecting the right assets for your portfolio.

Exactly right.

Thank you very much, Ben.

That was very insightful.

I appreciate your thoughts and views on infrastructure as an asset class.

Great.

Thanks for having me.