I. Sector Landscape and Outlook
The Transport and Infrastructure sector forms an integral part of economic development. With nearly 77% of population growth likely to occur in top-tier cities in Australia, the road and public transport congestion cost is expected to nearly double to $40 billion by 2031, according to Infrastructure Australia. The government had spent about $28.5 billion in road infrastructure in 2018-19, according to The Bureau of Infrastructure and Transport Research Economics. About 32.2 million passengers using the Sydney Airport, make it the busiest spots in the country in 2018-19. The transport and infrastructure sector generated $171.6 billion to the economy, representing 9.1% of GDP in 2019-20. The components of infrastructure and its growth trend have been detailed out in the below chart.
Figure 1. Transportation Forms a Sizeable Portion of Infrastructure GVA:
Data Source: The Bureau of Infrastructure and Transport Research Economics, Chart Created by Kalkine Group
Australia has a high population density in the urban areas. New South Wales, Victoria, and Queensland posted the highest kilometres travelled, totalling 191.86 billion out of 264.99 billion vehicle kilometres travelled in 2019-20. The government has added about 97 new projects to the Sydney transport network over the past five years that includes WestConnex, Sydney Metro Northwest, Sydney CBD, among others. Whereas Melbourne has over 275 new projects that were being added. As projected by the Infrastructure Australia, Sydney, and Melbourne may have higher congestion costs in 2031 as both states likely to have over six million residents by 2031.
According to Infrastructure Australia, the pandemic has affected construction and building projects to the extent of $5 billion and the industry is expected to show recovery to pre-COVID levels by 2023. As mentioned below, construction work done has declined by 1.4% to reach $59.49 billion in 2019-20. However, engineering work for the infrastructure activity remains healthy on a long-run basis, with increased expenditure by the state governments, particularly New South Wales and Victoria, in recent times.
Figure 2. The Pandemic has Impacted Construction Activity:
Data Source: The Bureau of Infrastructure and Transport Research Economics, Chart Created by Kalkine Group
With 877,651 kilometres of road length, the nation is recognized for several long-stretch roads. Australia is increasingly reliant on the road for freight movements. According to the data by Freight Australia, freight transportation by road showed steady performance reaching 224 billion tonne-kilometres of bulk and non-bulk freight movement in 2020. Road transportation provides seamless delivery during the lockdown and stay-at-home protocol in Australia. Airfreight transportation was affected by border closure restrictions.
Figure 3. Road Transportation Proved Resilient During the Pandemic:
Data Source: Freight Australia, Chart Created by Kalkine Group
In the 2020-21 budget, the federal government has allotted nearly $225 billion of infrastructure spending in government projects over the next four years to 2023-24. This represents an increase of 26% over the previous year’s budget. New South Wales and Victoria will continue to account for sizeable project pipelines. The ranking of states based on the project pipeline and share of budget allocation has been detailed in Figure 4. NSW remained in the top position for four straight years. NSW boasts the biggest budget for rail infrastructure with a $35 billion budget consisting of Sydney Metro West, Western Harbour tunnel, and so on. Victorian government has laid down a $19 billion rail budget that includes Suburban Rail Loop, Melbourne Airport Rail Link, among others. According to the data by Infrastructure Partnerships Australia, Northern Territory has the highest per capita infrastructure spend of over $17,800 per person, far higher than the national average of $8,777.
Figure 4. Ranking of States by Budget Allocation:
Data Source: Infrastructure Partnerships Australia, Chart Created by Kalkine Group
Index Performance:
The ASX 200 Transportation (Industry Group) Index generated 10-year returns of ~122.33% as compared to ~50.46% by the ASX 200 Index. Growth in various infrastructure investments by the government, steady performance by road and rail infrastructure, change in mobility requirements, and rapid urbanization are some of the factors that helped to post sector gains.
Figure 5: The ASX 200 Transportation (Industry Group) outperformed ASX 200 Index by whooping ~71.87% in the past ten years:
Source: Refinitiv (Thomson Reuters) as on the close of 6 May 2021
Key Risks and Challenges:
The pandemic lashed out the construction progress and engineering activity in Australia. According to The Australian Bureau of Statistics, the value of engineering work done fell 2.5% on a seasonally adjusted basis in the December 2020 quarter compared to the previous year. The report mentioned that public sector construction activity made a significant decline by 10.1% in the same period. The Transport and Infrastructure sector is exposed to longer project gestation periods with significant requirements for working capital and is relied on the investment push by the government. High traffic congestions in Sydney and Melbourne remains a concern. Infrastructure Australia pointed out that the cost of road and public transport congestions may nearly double to $40 billion by 2031. The sector is dependent on trade activity in the economy. The ongoing trade wars with China and global geopolitical instability may affect export and import movements. Prices of Australia’s rich iron ore exports, other base metals, and bulk commodities drives the trade movements. Seasonal factors play a pivotal role in agricultural and rural commodities trade, with incidents like Bush Fire affects agricultural produce.
Figure 6. Key Risks in the Transport and Infrastructure sector:
Sources: Analysis by Kalkine Group
Outlook:
The Transport and Infrastructure sector is on the top of the nation’s priority list for investments. To combat the pandemic, the government has added 44 new infrastructure proposals that provide a $59 billion pipeline of investment opportunities to progress in the near, medium, and long term. Since the beginning of 2021, 10 projects were moved into the construction phase. Some of the notable projects that are on the way include the M4 Motorway Upgrade (in NSW), METRONET Morley-Ellenbrook Line (in WA) and sections of the Bruce Highway and M1 Pacific Motorway (in QLD). Some of the new investments identified during the year include Rail access to Webb Dock (in VIC), Port of Burnie capacity (in TAS), Western Sydney Freight Line and Intermodal Terminal (in NSW), among others.
II. Investment theme and stocks under discussion (AZJ, AMA, ALX, MND))
After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘Price/Earnings’ method.
1. ASX: AZJ (Aurizon Holdings Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$6.99 Billion)
AZJ is rail-based transportation services in Australia. The company operates in three segments - Coal, Bulk and Network.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 20.54% on 6 May 2021. We believe that the stock might trade at a premium compared to its peer median Price/Earnings (NTM Trading multiple) considering the benefits from recent acquisitions and exit of loss-making business, Acacia Ridge Terminal, which is expected to improve profitability going forward. For the said purposes, we have taken peers such as Lindsay Australia Ltd. (ASX: LAU), Dalrymple Bay Infrastructure Ltd. (ASX: DBI), Qube Holdings Ltd. (ASX: QUB). The stock has delivered an annualized dividend yield of 7.47%.
2. ASX: AMA (AMA Group Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$371.01 Million)
AMA provides automotive paints and smash repair consumables, the manufacturing of dynamometers, and the remanufacturing of transmissions.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 28.41% on 6 May 2021. We believe that the stock might trade at a discount as compared to its peer average Price/Earnings (NTM Trading multiple), citing the company is dependent on vehicle sales for revenue growth. The lockdown, social distancing norms, and delay in mass vaccination may alter mobility requirements. For the said purposes, we have taken peers such as Mader Group Ltd. (ASX: MAD), Downer EDI Ltd. (ASX: DOW), SG Fleet Group Ltd. (ASX: SGF).
3. ASX: ALX (Atlas Arteria Group)
(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$5.75 Billion)
ALX is an infrastructure developer. The company is engaged in the construction of highways, roads, bridges, and tunnels.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 15.89% on 6 May 2021. We believe that the stock might trade at a premium as compared to its peer median Price/Earnings (NTM Trading multiple) considering the healthy traction in projects in France and the impact of the recent acquisition. Its Germany operations is expected to exhibit a steady balance sheet as the company is completing capital restructuring. For the said purposes, we have taken peers such as Qube Holdings Ltd. (ASX: QUB), Dalrymple Bay Infrastructure Ltd. (ASX: DBI), MAAS Group Holdings Ltd. (ASX: MGH). The stock has delivered an annualized dividend yield of 4.00%.
4. ASX: MND (Monadelphous Group Limited)
(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$1.18 Billion)
MND offers mining and processing industry maintenance, mining equipment refurbishment, and airport ground handling services to customers in Australia.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 15.83% on 6 May 2021. We believe that the stock might trade at a discount as compared to its peer average Price/Earnings (NTM Trading multiple), citing the company’s sizeable exposure to the oil and gas market, which had pulled down its industrial and maintenance services revenues in H1 FY21. For the said purposes, we have taken peers such as Johns Lyng Group Ltd. (ASX: JLG), MAAS Group Holdings Ltd. (ASX: MGH), Lycopodium Ltd. (ASX: LYL). The stock has delivered an annualized dividend yield of 3.01%.
Note: All the recommendations and the calculations are based on the closing price of 6 May 2021. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).
Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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