As we approach the midpoint of 2012 uncertainty about the global economic outlook persists and stock market strategies for high growth are becoming increasingly difficult to find. Infrastructure stocks may be one bright spot on the horizon.
While governments around the world are mired in debt, last week Treasurer Wayne Swan said the budget would project a $1.5 billion surplus in the 2012-13 financial year. Some business analysts are already claiming the government should worry less about a surplus and more about creating jobs. And given the need, the government has demonstrated its willingness to spend.
In response to the GFC the Rudd government announced a $42 Billion dollar stimulus package including $28.8 billion for infrastructure, schools and housing. A few days ago Opposition Leader Tony Abbott set forth his vision for infrastructure investment in roads, rail lines, port facilities, and dams over a 15 year period. In his own words, he “wants to see cranes in the sky and bulldozers on the ground because that means economic growth."
Put these facts together and you should smell investment opportunity - and there are ASX listed stocks that should stand to benefit. These stocks will include engineering firms that work on project design and the construction firms that do the actual building.
The following table lists 5 construction firms and 5 engineering firms that are prime candidates for a boost from increasing infrastructure development projects;
|Company ||Code ||Market Cap ||Share Price ||52 Week High ||52 Week Low ||Dividend Yield |
|Leighton Holdings ||LEI ||$6,489M ||$19.25 ||$26.25 ||$16.79 ||5.3% |
|United Group Holdings ||UGL ||$2,099M ||$12.62 ||$15.54 ||$10.95 ||5.7% |
|Monadelphous Holdings ||MND ||$1,897M ||$21.39 ||$24.37 ||$15.30 ||4.9% |
|Cardno Limited ||CDD ||$985M ||$7.13 ||$7.30 ||$4.18 ||4.9% |
|Macmahon Holdings ||MAH ||$517M ||$0.70 ||$0.90 ||$0.44 ||0.0% |
|Decmil Group ||DCG ||$470M ||$2.82 ||$3.56 ||$1.69 ||2.2% |
|Seymour White Limited ||SWL ||$162M ||$0.88 ||$1.55 ||$0.87 ||4.2% |
|Watpac Limited ||WTP ||$149M ||$1.91 ||$2.37 ||$1.65 ||7.7% |
|Coffey International ||COF ||$112M ||$0.47 ||$0.72 ||$0.36 ||0.0% |
|Structural Systems Limited ||STS ||$50M ||$0.78 ||$0.93 ||$0.62 ||5.1% |
Many of these companies are also engaged in infrastructure development in the mining and resources sector, and some have international exposure as well. All have some presence in non-mining infrastructure with plans to expand their presence as a means of diversification and of course protection against dwindling revenue should the resources sector slow substantially. Note that eight out of the ten companies listed above pay dividends, with even the smallest company in the table – tiny Structural Systems Limited (STS) - offering a respectable dividend of 5.1%.
Leighton Holdings (LEI)
Perhaps more than any other stock in the table, Leighton exemplifies one of the key risks in investing in infrastructure companies of any kind – project delays and cost overruns. Investors are buoyed at the signing of a new contract but the euphoria can quickly subside as the project runs awry. Leighton is the dominant infrastructure company in Australia and has a presence in South East Asia and the Middle East as well.
Leighton tends to perform well in mining and resources sector projects as they are usually of shorter duration and do not always require fixed price contracts. Large scale infrastructure projects are generally fixed cost with fixed time deadlines that often involve penalties for project delays. Both Leighton’s earnings and their reputation have suffered due to some of these issues, such as cost overruns at the Airport Link and Desalination projects.
Their one year share price chart shows the results of recent losses. We have compared them to the second largest infrastructure contracting and engineering company in Australia – Monadelphous Holdings (MND):
Monadelphous Holdings (MND) has been a long tem project provider for the nation’s largest resource, mining, and energy companies. The commodities boom has left them with minimal long term debt and strong net cash positions as well as stable cash flow. They have established an Infrastructure division which is growing but the company’s growth depends heavily on the stability of the commodities boom. Decreasing demand for iron ore, coal, and LNG would put the company at risk.
The future of the commodities boom is debatable, but there is a new resource bonanza on the Australian horizon and that is natural gas in a liquefied state – LNG. Woodside Petroleum (WPL) has finally begun LNG production at the long awaited Pluto LNG project. Energy analysts are predicting the coming of a golden age of gas and some are already worried about Australia’s capability to meet the anticipated demand with conventional gas supplies. As a result, exploration and drilling for gas from unconventional sources like shale gas and coal seam gas is expanding. Where there is new exploration and drilling, infrastructure needs follow. Both LEI and MND, and others, are positioned to benefit from this new commodity boom.
United Group Holdings (UGL)
UGL management has successfully diversified this company with multiple revenue sources and an increasing reliance on recurring revenues, largely from ongoing maintenance services. They have four major business divisions.
The infrastructure group is a multi-service business providing both construction and engineering services to the water, power, road and rail transport, communications and defense industries. The recurring revenue streams come from their operational and maintenance services offered to these organisations.
The Rail group offers rolling stock as well as an impressive array of technology solutions and maintenance services throughout the Asia Pacific region.
The Resources group provides project delivery and asset services to resources companies in mining and mineral processing, oil and gas, chemicals and industrial processing.
The Services group recently acquired a global provider of real estate services, DTZ, and the combined operation now provides a full range of property services in 45 countries around the world.
For conservative investors, UGL's revenue diversification is highly attractive. However, some brokers caution investors to be wary of underperformance in the resources sector, which would negatively impact UGL. Yet on 12 April 2012 the company announced new contract awards valued at $370 million dollars (AUD) the majority of which ($270M) are in the resources sector. Here is their one year share price movement chart:
Cardno Limited (CDD)
CDD is an engineering and professional services provider operating in Australia, New Zealand, and the Americas. Since they do not undertake actual construction work of infrastructure projects, they do not face the same risks as infrastructure construction companies - such as project delays and cost overruns. Their engineering services are highly specialised ranging from geotechnical and environmental engineering to remedial and structural engineering. They're also involved in social infrastructure projects such as natural resource management, community development, enterprise development and economic revitalisation. They are currently increasing their presence in the mining and oil and gas sectors.
From an investment perspective, having exposure to infrastructure development without construction risks is beneficial. Although their share price suffered in 2011, they have showed upward momentum in 2012. Here is their one year share price chart:
Macmahon Holdings (MAH) provides both engineering and construction services to the mining sector as well as to infrastructure projects ranging from roads to water to marine and rail. Their mining sector work is mostly in iron ore and coal and they are increasingly moving away from fixed price contracts, reducing risk to company earnings. Leighton has acquired a 19% interest in the company as MAH increasingly targets infrastructure construction and engineering. Some analysts believe this alliance was a move by Leighton to prevent a foreign takeover of Macmahon. Like Cardno, they had a rough 2011 but have rebounded well in 2023. Here is their chart:
Decmil Group Limited (DCG) is engaged in design, civil engineering, and construction services for the oil and gas, resources, and infrastructure sectors. Most of their clients are blue chip companies like BHP, Rio, Woodside, and Chevron. Accommodation villages are among the construction projects DCG offers its clients.
With a 20.6% Return on Equity and a 2 Year Earnings Growth forecast of 21.2% the company’s fundamental performance appears solid, but its recent share price performance does not reflect that. Here is their chart:
Seymour White (SWL) and Watpac (WTP) both appear to be in the process of reinventing themselves. SWL has roadwork and bridge infrastructure projects underway in Queensland and New South Wales, but their new focus is on expanding their presence in other sectors including rail, water, resources, and energy.
WTP has enough government infrastructure projects in place to ensure strong earnings in the near future while they further diversify their business. They are looking to become a major player along Australia’s eastern seaboard.
Below is its one year share price chart:
Coffey International (COF) has had a troubled past and a recent disclosure regarding potential accounting problems may result in a less than rosy future. Prior to the GFC the company embarked on an acquisition strategy for better risk management which had disastrous results. The company is now focusing on its core competencies in specialist knowledge in engineering and infrastructure. Their expertise should position them well for an infrastructure building boom, but there are other players here that offer less risk and a better history.
Structural Systems Ltd (STS) With a market cap of only $50M, why is tiny STS on this list? Well, for one thing they pay a hefty 5.1% dividend, fully franked. They have offices throughout Australia as well as in the Middle East and South Africa. They have five divisions -- Post-Tensioning, Construction, Civil, Remedial, and Mining Services. The post tensioning technology is a method for reinforcing concrete. Their portfolio of projects is impressive as are their various awards for project and engineering excellence. In short, this is a speculative play for those with a high risk tolerance. Their ten year price performance chart shows the path they were on before the GFC:
While STS may be highly speculative, companies like LEI and MND have proven track records and are already benefiting from existing infrastructure projects in Australia.
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