1
00:00:04,120 --> 00:00:06,680
Speaker 1: Welcome to the Fear and Greed summer series. I'm Sean Almer.

2
00:00:06,840 --> 00:00:09,840
Speaker 1: We continually hear about the need for infrastructure, from data

3
00:00:09,840 --> 00:00:14,120
Speaker 1: centers to roads and bridges, to telecommunications and energy. But

4
00:00:14,680 --> 00:00:17,480
Speaker 1: to be perfectly honest, there's not that many listed infrastructure

5
00:00:17,600 --> 00:00:21,800
Speaker 1: companies on the AX anymore. Is it still a good investment?

6
00:00:22,040 --> 00:00:25,800
Speaker 1: Lachlan Halloway is an equity market strategist at morning Star. Lachlan,

7
00:00:26,000 --> 00:00:28,960
Speaker 1: you are becoming a regular on Fear and Greed. Welcome back.

8
00:00:29,200 --> 00:00:30,400
Speaker 2: Thank you for having me back Sean.

9
00:00:31,120 --> 00:00:35,760
Speaker 1: So Lachlan, why should investors even care about infrastructure stocks?

10
00:00:35,840 --> 00:00:37,720
Speaker 1: What role do they play well?

11
00:00:37,760 --> 00:00:43,640
Speaker 2: Infrastructure can be the bedrock of a balanced or conservative portfolio.

12
00:00:43,760 --> 00:00:48,120
Speaker 2: Generally speaking, these assets are long lived, they are off

13
00:00:48,159 --> 00:00:53,240
Speaker 2: an inflation protected they have regulated earnings. They can also

14
00:00:53,320 --> 00:00:56,040
Speaker 2: be a great source of motor businesses because they have

15
00:00:56,600 --> 00:01:00,240
Speaker 2: irreplicable assets not uncommonly and as I said, baked in return,

16
00:01:00,720 --> 00:01:03,800
Speaker 2: which means the risk of value destruction is relatively low.

17
00:01:05,520 --> 00:01:08,880
Speaker 2: They are often a staple of more conservant investors portfolios,

18
00:01:08,880 --> 00:01:10,760
Speaker 2: but I think they also can play a role for

19
00:01:10,840 --> 00:01:14,880
Speaker 2: investors who are more growth oriented, because sometimes equity markets

20
00:01:15,120 --> 00:01:18,119
Speaker 2: generally look expensive and growth is richly priced, and if

21
00:01:18,120 --> 00:01:19,720
Speaker 2: you want to stay invested in equities and you don't

22
00:01:19,720 --> 00:01:22,560
Speaker 2: want to have to switch into something like bonds or

23
00:01:22,600 --> 00:01:24,440
Speaker 2: alternative assets, well maybe you can go to the more

24
00:01:24,560 --> 00:01:27,400
Speaker 2: defensive on the equity spectrum still of equity, like exposure,

25
00:01:27,520 --> 00:01:30,160
Speaker 2: but something like infrastructure can serve the more defensive role

26
00:01:30,520 --> 00:01:32,600
Speaker 2: in an equity portfolio. So I think there's many cases

27
00:01:32,640 --> 00:01:36,000
Speaker 2: to consider it. It's one of those things that is,

28
00:01:36,040 --> 00:01:38,640
Speaker 2: as you mentioned in the opening, disappearing, which is a shame.

29
00:01:38,760 --> 00:01:40,840
Speaker 2: There are still some names on there, but they are

30
00:01:40,959 --> 00:01:44,400
Speaker 2: disappearing relatively quickly, Okay, I mean Sydney Airport was a

31
00:01:44,400 --> 00:01:47,160
Speaker 2: big one, of course, that disappeared in the last couple

32
00:01:47,200 --> 00:01:48,360
Speaker 2: of years, so there have.

33
00:01:48,400 --> 00:01:52,600
Speaker 1: Been in quite a few. Are all infrastructure assets the same,

34
00:01:52,720 --> 00:01:56,960
Speaker 1: like a data centers, the same as poles and wires

35
00:01:56,960 --> 00:02:00,480
Speaker 1: for telco or energy transmission lines?

36
00:02:01,080 --> 00:02:05,160
Speaker 2: We would argue in general, no, we don't. They're not

37
00:02:05,200 --> 00:02:08,679
Speaker 2: all the same. We don't see the same degree of

38
00:02:08,720 --> 00:02:12,400
Speaker 2: competitive advantages in data centers, for example, at least not yet.

39
00:02:12,440 --> 00:02:14,959
Speaker 2: We don't see the moats there in terms of the

40
00:02:15,880 --> 00:02:18,519
Speaker 2: qualities about the sts that are conducive to long run

41
00:02:18,919 --> 00:02:22,840
Speaker 2: excess returns. On capital because we don't you know, yes,

42
00:02:22,880 --> 00:02:26,760
Speaker 2: there's obviously supply constraints now and they are over earning,

43
00:02:26,800 --> 00:02:29,160
Speaker 2: but we don't think they have say like a Sydney airport,

44
00:02:29,160 --> 00:02:32,480
Speaker 2: which is essentially a replicable asset in the city, or

45
00:02:33,160 --> 00:02:36,920
Speaker 2: a toll road for example, it's very hard to replicate

46
00:02:37,000 --> 00:02:40,320
Speaker 2: in as government regulated. It doesn't have the same MOTI

47
00:02:40,440 --> 00:02:44,120
Speaker 2: features we think in the data center world. And you

48
00:02:44,160 --> 00:02:47,040
Speaker 2: know that means that we think in just investors probably

49
00:02:47,120 --> 00:02:50,840
Speaker 2: have to be a little bit more creative maybe in

50
00:02:50,840 --> 00:02:53,040
Speaker 2: the way they think about infrastructure because a lot of

51
00:02:53,080 --> 00:02:59,120
Speaker 2: the traditional MOTI infrastructure businesses are disappearing and unfortunately very

52
00:02:59,160 --> 00:03:01,360
Speaker 2: few of them are coming back. And we saw Cube

53
00:03:01,600 --> 00:03:04,720
Speaker 2: not that long ago receive a takeover off of from mcquarie.

54
00:03:04,760 --> 00:03:07,800
Speaker 2: If that goes, when that goes, you know, that's as

55
00:03:07,880 --> 00:03:10,960
Speaker 2: yet another business on the traditional infrastructure side that will

56
00:03:11,040 --> 00:03:12,360
Speaker 2: leave the ASEX boards.

57
00:03:13,040 --> 00:03:14,480
Speaker 1: So I mean we used to be really good on

58
00:03:14,560 --> 00:03:18,080
Speaker 1: infrastructure in listed infrastructure. Is the fact that Cube and

59
00:03:18,400 --> 00:03:21,280
Speaker 1: Sitney Airport and had been taken private, be it by

60
00:03:21,400 --> 00:03:25,600
Speaker 1: super funds or big investors, is that basically a mark

61
00:03:25,639 --> 00:03:28,359
Speaker 1: of respect for our infrastructure sector. In a funny way,

62
00:03:28,560 --> 00:03:29,080
Speaker 1: I think.

63
00:03:28,919 --> 00:03:32,200
Speaker 2: That's probably fair, and I think super funds and pension

64
00:03:32,200 --> 00:03:34,679
Speaker 2: funds globally like these assets for the same reason that

65
00:03:34,680 --> 00:03:37,760
Speaker 2: that we like them. Again, they're long dated, they're protected,

66
00:03:37,920 --> 00:03:40,920
Speaker 2: they're inflation linked and so on and so forth, and

67
00:03:40,960 --> 00:03:43,720
Speaker 2: they're being picked off. Obviously, we kind of pioneered the

68
00:03:43,720 --> 00:03:47,840
Speaker 2: list instructure model in Australia with mcquarie's leverage infrastructure and

69
00:03:47,880 --> 00:03:51,600
Speaker 2: Baddock and Brown, which obviously imploded eventually, and then a

70
00:03:51,600 --> 00:03:55,560
Speaker 2: lot of these assets were then picked off and taken privately.

71
00:03:56,520 --> 00:03:58,960
Speaker 2: I think though, you know, if we think about, you

72
00:03:59,000 --> 00:04:02,200
Speaker 2: know more and more broadly, what's left. Yes, there are

73
00:04:02,240 --> 00:04:05,920
Speaker 2: a futurecitional infrastructure business left on the AX, you know

74
00:04:06,080 --> 00:04:11,200
Speaker 2: at last for example, Transurban Auckland Airport, but it's pretty

75
00:04:11,680 --> 00:04:16,560
Speaker 2: slim pickings. We had a look at the history of

76
00:04:16,600 --> 00:04:19,400
Speaker 2: instructured business on the AX. I think, you know, just

77
00:04:19,400 --> 00:04:22,520
Speaker 2: for the GFC, it peaked at about seventy now it's

78
00:04:22,520 --> 00:04:25,200
Speaker 2: about forty and the vast majority of those that are under

79
00:04:25,200 --> 00:04:28,640
Speaker 2: a mark hab of billion dollars. So it's thinning out

80
00:04:28,839 --> 00:04:31,760
Speaker 2: and that is a shame. We like more businesses, not less.

81
00:04:32,240 --> 00:04:35,720
Speaker 1: Across the board. There are, as you say, only a

82
00:04:35,760 --> 00:04:38,559
Speaker 1: handful of traditional infrastructure names left then, and you mentioned

83
00:04:38,600 --> 00:04:41,719
Speaker 1: a few, transurban being the largest of those. Where should

84
00:04:41,760 --> 00:04:44,520
Speaker 1: investors look, because some people still want to buy ASEX

85
00:04:44,520 --> 00:04:47,920
Speaker 1: listed infrastructure, where should they look of.

86
00:04:47,800 --> 00:04:51,839
Speaker 2: The traditional bunch, Auckland Airport looks like the best value

87
00:04:51,920 --> 00:04:56,480
Speaker 2: to us. It's you know, again, in tangible asset replicable.

88
00:04:56,720 --> 00:05:00,120
Speaker 2: It's New Zealand's gateway to the world. There's concerned earn

89
00:05:00,160 --> 00:05:03,520
Speaker 2: at the moment about CAPEX required to redo the airport,

90
00:05:03,640 --> 00:05:05,919
Speaker 2: but once they move over the hump of that, we

91
00:05:06,000 --> 00:05:10,320
Speaker 2: think again there's a long attractive return outlook for Auckland Airport.

92
00:05:10,760 --> 00:05:12,719
Speaker 2: That's one the last one I say that looks truly

93
00:05:12,760 --> 00:05:16,000
Speaker 2: undervalued on the t trictional infrastructure side. Interestingly, though, I

94
00:05:16,040 --> 00:05:18,200
Speaker 2: think if you're willing to sort of squint your eyes

95
00:05:18,240 --> 00:05:22,720
Speaker 2: and think more broadly about infrastructure infrastructure like characteristics, there

96
00:05:22,720 --> 00:05:24,960
Speaker 2: are a few good options. You know. I think two

97
00:05:24,960 --> 00:05:26,479
Speaker 2: of the ones that are more interesting at the moment

98
00:05:27,200 --> 00:05:30,160
Speaker 2: would be PEXA and Brambles.

99
00:05:30,200 --> 00:05:33,040
Speaker 1: To us, Brambles is an infrastructure asset.

100
00:05:33,400 --> 00:05:35,719
Speaker 2: It's a funny one. Yeah, I don't think many people

101
00:05:35,760 --> 00:05:38,800
Speaker 2: think about it like that, but you know, if you're

102
00:05:38,839 --> 00:05:43,000
Speaker 2: a little bit creative, well, Brambles. It's palett's perfectively the

103
00:05:43,080 --> 00:05:46,240
Speaker 2: highway on which fastening consumer goods around the world move.

104
00:05:46,400 --> 00:05:48,479
Speaker 2: The palettes move too. They're not fixed in place like

105
00:05:48,760 --> 00:05:51,839
Speaker 2: a toll road or rail, but they effectively serve the

106
00:05:51,880 --> 00:05:56,719
Speaker 2: same purpose. A few nice things about Brambles. It has

107
00:05:57,600 --> 00:06:01,320
Speaker 2: returns on equity that basically unpower old inditional infrastructure. You know,

108
00:06:01,480 --> 00:06:04,880
Speaker 2: fifteen percent plus ROI is not normal for infratructure business,

109
00:06:04,920 --> 00:06:06,839
Speaker 2: and it's not regulated in the same way, so it's

110
00:06:06,960 --> 00:06:10,640
Speaker 2: returns of historically been a lot better. It's near monopolist

111
00:06:10,720 --> 00:06:12,440
Speaker 2: in pulled palettes in most of the marks in which

112
00:06:12,480 --> 00:06:15,720
Speaker 2: it operates. That's very attractive too. As it gets bigger,

113
00:06:15,720 --> 00:06:18,200
Speaker 2: it gets better the cost advantage on the multiplies as

114
00:06:18,200 --> 00:06:19,880
Speaker 2: you get larger, and I would argue that for the

115
00:06:19,960 --> 00:06:24,039
Speaker 2: users of its palettes, the value proposition also improves because

116
00:06:24,040 --> 00:06:26,720
Speaker 2: you get more network density. Unlike say a toll road,

117
00:06:26,760 --> 00:06:29,920
Speaker 2: where I don't think the user's experience necessarily improves when

118
00:06:29,920 --> 00:06:31,840
Speaker 2: people get onto it, this one does. So that's a

119
00:06:31,920 --> 00:06:34,880
Speaker 2: nice attribute. So Brambles are not screaming under value to

120
00:06:34,920 --> 00:06:36,880
Speaker 2: us today like it was a year ago. But it's

121
00:06:36,920 --> 00:06:39,600
Speaker 2: a very high quality business at a reasonable price, and

122
00:06:39,640 --> 00:06:42,160
Speaker 2: I think that's a that's a bree good attribute right now.

123
00:06:42,680 --> 00:06:45,480
Speaker 1: Lachlan, thank you for talking to Fear and Greed summer series. Thanks.

124
00:06:45,720 --> 00:06:48,800
Speaker 1: That was Lachland Halloway, equity market strategist at Morning Star.

125
00:06:48,880 --> 00:06:50,919
Speaker 1: Fearing Grid is not a financial advice podcast. If you

126
00:06:50,960 --> 00:06:53,279
Speaker 1: want to invest, we recommend you visit a financial advisor

127
00:06:53,320 --> 00:06:56,520
Speaker 1: who can tailor investments investments to your needs. Don't forget

128
00:06:56,520 --> 00:06:59,800
Speaker 1: tit funnel on the podcast. New episodes every day during

129
00:06:59,800 --> 00:07:03,280
Speaker 1: our summer series. I'm Schinoma. This is hearing greet