Buy a nation builder

Chief Investment Officer and founder of Aitken Investment Management
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The biggest frustration with living in Sydney is its inadequate arterial road and motorway network. It is retarding Sydney’s productivity.

And I’m sure it’s not that much different in the other capital cities.

Infrastructure is always playing catch up to demand, which further reduces productivity during road upgrades.

I believe we are entering a new period for Australia, where federal and state funds are committed to critical infrastructure projects that reap economic rewards well beyond the current election cycle.

I also believe we are entering a period of renewed federal and state cooperation in terms of infrastructure projects.

Federal and state political leaders are clearly working out the greatest sustained GDP multiplier you can generate from allocation of taxation dollars is via infrastructure upgrades, but particularly roads. You get a shorter-term GDP multiplier lift in the construction phase, and a longer-term GDP multiplier lift in the completion phase, via productivity gains. This is another reason I believe Australian GDP growth is bottoming right now.

Money to burn

At the same time, the superannuation system is flush with funds looking at long life projects to meet obligations, which can’t be met with 4% bond yields (1.5% real). More importantly, Canberra is looking at the hundreds of billions of dollars held in unproductive cash and looking at ways of using this to fund infrastructure through tax efficient bonds inside the super/SMSF system.

Sydney’s current arterial road and motorway network remains a patchwork of inefficiency, with major motorways starting and ending at two lane roads, motorway tunnels that are two lanes, federal roads meeting state roads, numerous 3:2 merges and clear missing links. One oversize truck going into a tunnel causes hours of gridlock!

The solution

Critical upgrade projects I would build over the next decade to vastly improve the road transport infrastructure of Sydney and its economic efficiency/productivity include:

  • M1 (F3) –M2 missing link tunnel (8kms)
  • Westconnex 33kms from M4 East to Anzac Bridge and M4 East to M5 at Beverly Hills (not 90210)
  • Widening of the Eastern Distributor to three lanes each way
  • Widening of the M5 tunnel to three lanes each way
  • Construction of the M6 “Shire Motorway” from the M5 at Kogarah to the F6 at Heathcote
  • Construction of the M8 “inner ring motorway” from the M2 cross M4 to M5 at Bankstown

These are massive multi-year infrastructure projects that will require tunnelling expertise, road building expertise, civil works, concrete, slab steel, reinforcing bar, heavy equipment and manpower. As the mining capex boom peaks over the next few years, the re-mobilisation of skilled labour and equipment will head East.

The opportunities

I am only using the Sydney basin motorway example above, but you can be certain that a renewed national political focus will be on infrastructure upgrades and innovative ways of funding them (buy Macquarie Group).

Nation building – you are going to hear those words used a lot more over the years ahead and you need to own a few “nation builders”. Leighton (ASX Code: LEI), Lend Lease (LLC), Seven Group (SVW) through Caterpillar/ Coates Hire, Downer EDI (DOW), Boral (BLD), Arrium (ARI) and Bluescope Steel (BSL) are the most obvious “nation builders”.

The buy/hold/sell ratio on each of those stocks is below, with the current consensus P/E for FY14, yield and price target. You can see there is very little optimism in the share price targets and clearly no acknowledgement (yet) of the above. The majority of P/E’s also look bottom of the cycle. FY15 could be huge for these names as what I write about unfolds.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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