Australia's road and airport shares are poised to be snapped up as cheap targets by pension funds and private equity investors after being battered by heavy debt burdens, soaring fuel prices and air traffic cuts.
Infrastructure stocks such as toll roads operators Transurban Group and Macquarie Infrastructure Group have tumbled in the past month as investors have fled any groups carrying heavy debt as they face rising interest costs.
The market sees even higher risks in the near term for funds such as Macquarie Airports and Australian Infrastructure Fund, which own airports, with airlines raising fares and curbing air traffic, and Australians feeling the pinch of rising interest costs.
"They're being grossly mispriced by the market," said Will Seddon, an analyst with White Funds Management.
"The market's focusing too heavily on short term factors. There's a big opportunity there for someone who has a long term investment horizon."
Two Canadian pension funds now dominate Transurban's register after a share sale by the firm, with CPP Investment Board and Ontario Teachers' Pension Plan Board each owning 14%.
Highlighting the lure of infrastructure, Morgan Stanley and a fund set up by General Electric and Credit Suisse said last month they had raised nearly $10bn collectively to invest in infrastructure projects around the world.
Fund managers and analysts say investors have focused too heavily on the risks of debt refinancing and the potential for Australian infrastructure funds having to cut their distributions.
Stocks have also been hit by fears that rising fuel costs will cap traffic growth in the short term, especially in North America and Britain, where MIG and Transurban have stakes in roads including highway 407 in Toronto and the Capital Beltway around Washington DC
Australian infrastructure stocks have fallen between 25% and 51% so far this year versus a 17% drop in the broader market index.
PENSION FUNDS KEEN
Analysts and fund managers expect pension funds and private equity funds hunting for infrastructure assets to pounce on the beaten-down Australian funds in the near- to medium-term, with banks keen to back infrastructure deals. The most obvious target is Transurban, following a complete change of tack last week under its new Chief Executive, Chris Lynch, who rejected the model of using debt to pay strong dividends.
"That would be on any pension fund's radar screen because they like the long term nature of these assets and the cash flows," said Jason Teh, a portfolio manager with Investors Mutual.
Transurban said it would cut its distributions next year and fund them from cash flows. To shore up its balance sheet, the firm launched a share sale to raise up to A$1bn. The cut in distributions sent retail investors scurrying.
Pointing to the $12.8bn a group led by Citigroup paid last month to lease the Pennsylvania Turnpike, Seddon said, "That was a massive deal. There were no issues there for getting funding for that."
CPPIB, which was thwarted by the New Zealand government in a $1.4bn bid for a cornerstone stake in Auckland International Airport Ltd in April, paid A$5.49 a share to increase its stake in Transurban, now 32% above Transurban's last trade.
Analysts said while MIG and MAP as well as funds run by Babcock & Brown might be cheap, they would be harder to take over because investment banks Macquarie Group and Babcock & Brown would be reluctant to lose those funds as vehicles for raising capital.
"Obviously, Macquarie can't let these vehicles languish forever," Teh said.
Fund managers said some assets were proving resilient to short term knocks and showed that it was not smart to lump the whole infrastructure sector in one basket.
Australian Infrastructure Fund, with stakes in regional Australian airports and Perth Airport, is not being hit with the same traffic cuts as some other airports.
Perth Airport is bursting at the seams on the back of flights to and from booming mining areas in Western Australia. And other regional airports are picking up traffic from budget airlines, like Air Asia, setting up direct flights to Asia and avoiding the big city hubs of Sydney and Melbourne.
JP Morgan analysts tipped Macquarie Airports as a long-term pick, citing the firm's strategic assets that had monopoly characteristics with strong management who had a track record of finding new streams of revenue outside air traffic.
"We are of the view that MAP has been oversold on the back of concerns around the demise of the airline industry," JP Morgan said in a research note.
Australia's newest toll road, EastLink, owned by ConnectEast Group opens on Sunday. Although the A$2.5bn road was completed five months ahead of schedule and on budget, its shares are trading 24% below their asset backing.
Scrutiny of the infrastructure sector comes just as the owners of Brisbane's planned airport road, Brisconnections, are set to launch an initial public offering to raise A$1.2bn.
By Sonali Paul, Reuters
