Two ASX-listed infrastructure stocks for a rising interest rate environment

By Market Index
Mon 05 Sep 22, 1:39pm (AEST)
Source: Unsplash

Key Points

  • Listed infrastructure companies have greater ability to pass on higher prices when interest rates rise
  • Atlas Arteria (ASX: ALX) is expected to be taken over by IFM Investors
  • The number of infrastructure stocks remaining on the ASX can be counted on one hand

Given their ability to pass on higher prices within a rising interest environment, ASX-listed infrastructure stocks have become increasingly attractive to investors.

Trouble is institutional investors are also attracted to the defensive earnings qualities of infrastructure stocks and have been picking them off one-by-one over the last couple of years.

As a result, there are precious few ASX-listed Infrastructure stocks left listed in the ASX.

The likely takeover of toll road operator, Atlas Arteria (ASX: ALX) by global institutional investment manager, IFM Investors - which currently owns just shy of the 20% threshold at which it would be required by takeover rules to launch a formal offer for the whole company – also has an air of inevitability about it.

Within the rare pickings of listed infrastructure assets on the ASX are one large-cap APA Group (ASX: APA) and one mid-cap, Argo Global (ASX: ALI), let’s take a look at the fortunes of each stock.

APA Group

Formerly Australian Pipeline Trust, APA is an energy infrastructure business that owns and operates a $21bn portfolio of gas, electricity, solar and wind assets.

Responsible for delivering around 50% of the country’s gas use, APA links Victoria with SA and NSW with Qld via its investment in electricity transmission assets.

Key asset

Contributing around 94% of both revenue and underlying earnings (EBITDA), energy infrastructure accounts for the lion’s share of APA's business.

Segment breakdown includes:

  • East Coast gas: Revenue of $806m and earnings (EBITDA) of $648m, up 3.3% over 2021.

  • Wallunbilla Gladstone Pipeline: Revenue of $581m and earnings (EBITDA) of $577m, up 5.1% over 2021 – due in part to a 7.5% increase in tariffs from 1 January this year.

Full year result

What dominated investor attention was the shock resignation of CEO Rob Wheals, plus revelations that the group favours fast-transitioning the domestic market over making an acquisition in the US.

The group reported statutory revenue for the full year to 30 June 2022 of $2,236.6m, up from 4.3% the previous year, while earnings (EBITDA) of $1,630.2m were down 0.5%.

On an underlying EBITDA basis, earnings were up 3.9% on the previous year, while free cash flow was up 20% to $1,628.8m.

In line with guidance, the group distributed 53 cents per share, up 3.9% on FY21.

Pleasingly for shareholders, APA has grown its distribution every year for the past 15 years.

At 30 June 2022, APA had delivered a total shareholder return of 16.4% on an annual compounding basis since listing.

No FY23 guidance was provided.

APA share price over 12 months.

What brokers think

The APA share price is up 17.10% over one year, but since early August has bounced lower from $12.12 to $10.70.

Consensus on the APA is Hold.

Based on Morningstar’s fair value of $9.68 the stock appears to be overvalued.

Based on the six brokers that cover APA (as reported on by FN Arena) the stock is currently trading with 1.8% upside to the target price of $10.85.

With FY22 operating earnings -3% below Ord Minnett's forecast, the broker maintains a Hold rating, and reduces the target to $11.20 from $11.50 after concluding the group lacks catalysts.

The broker believes failed attempts to buy Ausnet and the exit of the US strategy leaves investors with a stock that is leveraged purely to organic growth.

But the broker concludes that the business is positioned through its balance sheet and skills to gain leverage to the energy transition with investment required in gas pipelines, transmission infrastructure and renewable power plants.

Morgans also maintains a Hold rating (target price $10.31) and notes within FY22 asset performance a downward trend in the take-or-pay/contracted percentage of revenues.

Argo Global Listed Infrastructure

Argo Global is a listed investment company (LIC) which provide investors with exposure to a diversified portfolio of global listed infrastructure securities.

The company’s portfolio of infrastructure stocks is diversified across both emerging and developed economies. 

The stock’s share price rallied by around 4% last Monday after reporting solid full year FY22 earnings.

Net profit of $29.9m was up 59% on the previous year, while net tangible assets (NTA) of $2.45 per share, were up 4.3%.

Management declared a final and fully franked dividend of 4.5 cents per share (CPS), unchanged from the previous year.

FY22 highlights

The LIC’s infrastructure portfolio delivered a return of 12.2% for the 12 months to 30 June 2022, versus the S&P/ASX 200 Accumulation Index’s loss of -6.5%.

The LIC noted that a weaker A$, plus returns from “midstream energy pipelines and storage assets, in the wake of Russia’s invasion of Ukraine" factored strongly in portfolio performance.

Commenting on the defensive characteristics of this asset class, management reminded investors that when broader global and local equities plunged -4.7% and -8.8% respectively in June this year, global listed infrastructure fell just -2.1%.

Looking forward

Management expects strong private investor demand for infrastructure assets to continue, both in Australia and globally.

“… in the immediate term, we expect the outlook for infrastructure stocks will continue to be shaped by macroeconomic factors, including higher inflation, rising interest rates and the potential for slower economic growth,” the LIC noted.

Argo Global Listed Infrastructure is up 5.69% over one year, with the share price bounding from a year-to-date low of $2.16 mid-June to $2.61.

Consensus does not cover this stock.

Argo Global Listed Infrastructure: A 12-month snapshot.


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