The largest exposures in our Listed Infrastructure strategy are toll roads and tunnels (17%), diversified infrastructure companies (16%), and rail & bus (16%). Rail & bus, agricultural infrastructure and communications towers stocks were largely unchanged over the last month, while waste recycling (the smallest allocation), communications and social infrastructure (also a small allocation), performed poorly.
Toll roads and tunnels stocks were affected by bond market weakness in June, but are still paying significant dividends. The biggest loser has been Eurotunnel. The refinancing of the group’s Tranche C debt has been finalised, thereby reducing the average cost of debt by 2% to just under 4%, and releasing €260m in cash to bolster the Eleclink project. Eurotunnel reported a fall of 7% in passenger shuttles for June, but we increased our stake on the share’s weakness.
Vinci SA was down 4% as press reports circulated that it was preparing a bid for Groupe ADP (Paris airports) if the French government decides on full privatisation. Vinci already owns stakes in 35 airports worldwide. Transurban was also down 4%. There are concerns that its major tunnel project in Melbourne may be delayed, since this requires a vote by the state of Victoria and there is currently a lack of political consensus.
Diversified infrastructure is the strategy’s second largest allocation (16% of the portfolio) and lost 2% during the month. CK Hutchison Holdings lost 3.5% in advance of its release of Q2 earnings on fears that currency headwinds (principally GBP/HKD) will pose a challenge, while 3i Infrastructure plc dropped 4%. However, 2Q income was in line with expectations, and 58% ahead of the prior year. Its balance sheet remains healthy with significant capacity for additional investments.
In the Rail and bus sector, the stand-out performer has been Kansas City Southern, up 10%. Investors are reassessing the prospects of its refined products business and cross-border (US / Mexico) intermodal freight, both of which represents considerable upside. EBIT and EPS growth are now likely to surpass KSU’s US peers, whilst its PE ratio is one point behind the peers.
Social infrastructure company, HICL Infrastructure, was down 6% for the month after raising GBP 267m in new equity. We participated in this issue. HICL remains on track to achieve its IRR target of 7-8% this year, and we expect it to increase its dividend, yet again, by 2.5% this year.
Cable company Comcast lost 6.6% on news that, together with Charter Communications, it might take a stake in Sprint Corp. Although a possible outright acquisition might be a possibility, it more probable that these firms would invest in exchange for favourable terms to offer wireless services.