With this month’s federal Budget trumpeted as an “infrastructure Budget,” the sharemarket’s infrastructure stocks should have liked it, and it appears they did.
None were given direct jobs or handouts, but the estimated $50 billion of infrastructure spending on roads, rail and ports outlined in the 2014 Budget over the next six years – a $9 billion increase – can be expected to flow through into significant work.
The spending includes Stage 2 of the East West Link road tunnel project in Melbourne, the North-South Road Corridor in Adelaide, the Toowoomba Second Range Crossing in Queensland and the Perth Freight Link project linking Perth Airport with Fremantle Port.
More importantly, the Budget outlines a way for state governments – which are asset-rich but cash-poor – to privatise assets and commit the funds raised to new infrastructure, and receive a 15% funding commitment from the commonwealth in return for this “asset recycling.” The idea is to kick-start growth in infrastructure funding that is not reliant on just this Budget.
The infrastructure spending is touted by the government as an essential part of underpinning the economy’s transition from being driven by resources investment to spending across the non-resources part of the economy. The engineers and contractors are just as happy to work in both areas: a boost to infrastructure spending won’t suddenly galvanise the sector – it is more a case of keeping it humming.
Contractors
Major contractors Leighton (LEI) and Lend Lease (LLC) will be at the front of the queue for new infrastructure work, particularly road funding: both are involved in consortiums short-listed for the East West Link project for example, and will be involved in other work flowing from the Budget. Leighton currently has $41 billion of work in hand and has guidance in place for a full-year underlying net profit of between $540 million–$620 million.
Although the analysts that follow Leighton see it as fully-priced at the moment: the consensus target price is $19.70, which is 4% below the current price of $20.55. However, it is trading on a 5.2% projected fully franked yield for FY15.
Lend Lease – which gets 21% of its earnings from construction and engineering – is also well placed to extend its reach in infrastructure. Lend Lease recently struck deals to build a $2.65 billion twin-tunnel tolled link at Sydney’s NorthConnex Motorway and is the preferred tenderer for the third package of Pacific Highway upgrade contracts, worth about $580 million.
Lend Lease is also arguably fully valued by the market, with a share price at $13.70 trading 4% above the analysts’ consensus target price, of $13.16. Its FY15 forecast yield of 3.5% is not exciting, either, especially with 30% franking.
Roads
Toll-road owner and operator Transurban Group (TCL) stands to benefit from the Budget’s spending boost to the East West Link road tunnel project in Melbourne. Transurban is not part of the East West Link Stage One project – it does not like the tolling model, under which the state government will hold control of the tolling company for the east-west link before selling it in the longer term – but the East West Link will boost the traffic on Transurban’s City Link.
Although it is not a partner in East West Link, Transurban is funding a $850 million upgrade to the Western Link of CityLink, the Bolte Bridge-West Gate Freeway interchange and Tullamarine Freeway. The project will address congestion and improve safety at critical points in the corridor as well as enhance the Integration of the East West Link into City Link.
Transurban also benefits from the NorthConnex project in Sydney, which will link the M1 Pacific Motorway to its Hills M2 toll-road.
Like Leighton and Lend Lease, Transurban is not a hidden story on the sharemarket: its share price, at $7.31, is comfortably above the analysts’ consensus forecast of $7.02. But there is a 5.4% forecast yield on FY15, franked at 25%.
Engineering group RCR Tomlinson (RCR) is another business that could benefit from the Budget boost to the East West Link road tunnel in Melbourne. RCR’s Infrastructure division has a growing specialty in the HVAC (heating, ventilation and air conditioning) work for tunnelling: it is currently working on the Legacy Way Road Tunnel in Queensland, and sees East West Link as a major growth opportunity for the division.
Analysts that follow RCR Tomlinson have a target price of $3.60 on the stock: at $2.95, RCR trades about 18% below that. Its forecast yield (FY14) stands at 3.4%, fully franked.
Other engineering stocks considered likely to benefit over the medium term from the 2014 Budget include Downer EDI (DOW), UGL (UGL) and Transfield Services (TSE). Best value there on consensus price forecast grounds appears to be Downer EDI, which is 8% short of its analysts’ consensus price, with a 5% yield (70% franked.)
Given the focus on road funding, another way to invest in the Budget boom is the actual road-building materials providers. Cement suppliers Boral (BLD) and Adelaide Brighton (ABC) should benefit here, as should steel supplier Bluescope (BSL). Of this trio, analysts see most price-upside value in Bluescope and Boral, although neither has a compelling dividend yield, at 1.9% and 3.6% (forecast) respectively.
Upside potential
One stock that does have upside, and which will benefit from the Budget, is Asciano (AIO), Australia’s only combined rail freight and port operator. Asciano’s analyst followers have a consensus target price of $6.30, which sits comfortably (10%) above the current price ($5.73), although its FY15 fully franked yield of 2.8% is not a great bonus.
Asciano is expected to benefit from some of the more behind-the-scenes projects likely to be kick-started by the Budget, with the national freight rail network in line for a significant infrastructure upgrade: work such as replacing some of the older timber bridges, which can potentially cut hundreds of kilometres out of the freight journeys, particularly on the eastern seaboard. The potential for productivity gains for Asciano is quite high.
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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