•
• •
•
•
• • • • •
•
• •
•
•
•
•
•
• •
• • • • • •
Dissecting Listed Infrastructure in the New World Gerald Stack Head of Investments & Infrastructure Magellan Asset Management
Important Information This presentation (‘Presentation’) has been produced by Magellan Asset Management Limited (‘Magellan’) ABN 31 120 593 946, AFS Licence No 304 301 and has been prepared for informational and discussion purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any security or financial product or service. Any such offer or solicitation shall be made only pursuant to a Product Disclosure Statement, Information Memorandum or other offer document (collectively ‘Offer Document’) relating to a Magellan financial product or service. A copy of the relevant Offer Document relating to a Magellan product or service may be obtained by calling Magellan on +61 2 9235 4888 or by visiting www.magellangroup.com.au. This Presentation does not constitute a part of any Offer Document issued by Magellan. The information contained in this Presentation may not be reproduced, used or disclosed, in whole or in part, without the prior written consent of Magellan.
Past performance is not necessarily indicative of future results and no person guarantees the performance of any Magellan financial product or service or the amount or timing of any return from it. There can be no assurance that a Magellan financial product or service will achieve any targeted returns, that asset allocations will be met or that a Magellan financial product or service will be able to implement its investment strategy and investment approach or achieve its investment objective. Statements contained in this Presentation that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this Presentation may contain “forward-looking statements”. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements. Certain economic, market or company information contained herein has been obtained from published sources prepared by third parties. While such sources are believed to be reliable, neither Magellan or any of its respective officers or employees assumes any responsibility for the accuracy or completeness of such information. No person, including Magellan has any responsibility to update any of the information provided in this Presentation. This Presentation must not be regarded as advice or a recommendation in relation to a Magellan financial product or service, or that an investment in a Magellan financial product or service is suitable for you or any other person. This Presentation does not take into account your investment objectives, financial situation or particular needs. In addition to carefully reading the relevant Offer Document you should, before deciding whether to invest in a Magellan financial product or service, consider the appropriateness of investing or continuing to invest. Magellan strongly recommends that you obtain independent financial, legal and taxation advice before deciding whether to invest in a Magellan financial product or service. © 2018 Magellan. All Rights reserved. MAGELLAN and EXPERTS IN GLOBAL INVESTING and the Magellan logo are registered and unregistered trademarks of Magellan Asset Management. Third-Party trademarks, logos, and service marks contained herein are the property of their respective owners.
DP049
Magellan | 9
Agenda 1. Why definition is important to investment in Infrastructure 2. Utilities – Economic Model, Impact of Covid-19, 3. Transport Infrastructure 4. Communications Infrastructure 5. Magellan Infrastructure Fund – Objectives, Outcomes & Investment Portfolio RP158
Magellan | 10
Commonly used definition of infrastructure
Essential Assets: Essential for the efficient function of a community
Demand is predictable
RP079
Magellan | 11
The universe of infrastructure assets 350 stocks with a market capitalisation of more than US$3 trillion
Utilities
Transport
Social
Water Utilities
Airports
Hospitals
Gas Utilities
Toll Roads
Schools
Energy Transmission and Distribution
Pipelines
Prisons
Communication Power Generation Power Retailers
Ports Rail
Satellites Master Limited Partnerships
Car parks RP079
Magellan | 12
Magellan’s definition of infrastructure Strict definition: critical to reliable earnings through the economic cycle
Essential for the efficient function of a community
Demand is predictable
AND
Earnings are NOT sensitive to competition, commodity price movements or sovereign risk
Cashflows are reliable
RP158
Magellan | 13
Magellan’s infrastructure universe 130 stocks with a market capitalisation of more than US$1.5 trillion
Utilities
Transport
Social
Water Utilities
Airports
Hospitals
Gas Utilities
Toll Roads
Schools
Energy Transmission and Distribution
Pipelines Communication Ports Rail
Power Generation Power Retailers
Satellites
Prisons
Master Limited Partnerships
Car parks RP079
Magellan | 14
Utilities – Economic model, impact of covid-19
Magellan | 15
Magellan’s infrastructure universe Utilities
Transport
Social
Water Utilities
Airports
Hospitals
Gas Utilities
Toll Roads
Schools
Energy Transmission and Distribution
Pipelines Communication Rail
RP158
Magellan | 16
Utilities – Nature of returns
The regulation of utility earnings leads to stable financial results and ultimately stable investment returns
Regulation allows utilities to earn fair returns with low potential for loss.
Earnings regulation leads to stable financial results
IP053
Magellan | 17
How regulation works for regulated utilities Capital Employed – “Rate Base”
x
(A)
Cost of Capital
=
Net Profit After Tax + Income Tax
=
Net Profit Before Tax
+
(B)
Interest Expense
+ Depreciation
+ Operating Expenditure & Cost of Energy
=
Revenue ÷
(C)
Energy Volume
=
Energy Price RP104
Magellan | 18
Regulation leads to stable financial performance The earnings of US regulated utilities were stable through the recession Return On Equity for the Magellan US Regulated Energy Utilities Index 15% 14% 13% 12%
11% 10% 9% 8% 7% 6% 2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: Company accounts, Magellan Asset Management Limited analysis. Utility group includes Alliant Energy, Atmos Energy, Consolidated Edison, Northeast Utilities, ITC/Fortis, Southwest Gas, Southern Company, Westar Energy, PG&E, WEC & Xcel Energy.
RP079
Magellan | 19
Impact of covid-19 upon regulated earnings Capital Employed – “Rate Base”
x
(A)
Cost of Capital
=
Net Profit After Tax + Income Tax
=
Net Profit Before Tax
+
(B)
Interest Expense
+ Depreciation Operating Expenditure & Cost of Energy
Utility can reduce costs or spread negative impacts over the medium-term
Revenue
Reduction in Revenue / Bad Debts
+
= ÷
(C)
Energy Volume
=
Reduction in volumes
Energy Price RP158
Magellan | 20
Regulated utilities – Impact of covid-19 on earnings Company
Type of Utility
Impact of covid-19 on 2020 results
US gas distribution
Confirmed earnings guidance
2 Eversource Energy
US electricity and gas
Confirmed earnings guidance
3 Sempra
US electricity and gas
Increased earnings guidance
4 Xcel Energy
US electricity and gas
Confirmed earnings guidance
Italian gas transmission
Confirmed earnings guidance
US water
1% reduction in earnings guidance
US electricity and gas
Confirmed earnings guidance
Italian electricity transmission
Confirmed earnings guidance
Australian electricity
Hasn’t reported yet
UK and US electricity and gas
FY20 EBIT reduced by approx. 4% will be recovered in future years
1 Atmos Energy
5 SNAM 6 American Water 7 WEC Energy 8 Terna 9 Spark Infrastructure 10 National Grid
?
Source: Magellan research
RP158
Magellan | 21
Outlook for regulated utilities 1. Earnings largely unaffected 2. Low interest rates for the foreseeable future is supportive of utility valuations
RP158
Magellan | 22
Regulated Utilities – 2020 investment performance Investment returns for the 7 months to 31 July 20201 Utilities
-3.6%
Made up of Water Utility
3.3%
Integrated Power
-7.7%
Transport & Distribution
1.6%
Gas
-6.6%
Investment returns represent the market capitalization weighted average investment return for regulated utilities that meet Magellan’s definition and are domiciled in OECD markets Source: Magellan research 1
RP158
Magellan | 23
Infrastructure
Magellan | 24
Magellan’s infrastructure universe Utilities
Transport
Social
Water Utilities
Airports
Hospitals
Gas Utilities
Toll Roads
Schools
Energy Transmission and Distribution
Pipelines Communication Rail
RP158
Magellan | 25
Infrastructure – Nature of returns
Because revenues and earnings grow in line with patronage growth, infrastructure assets are able to earn high returns Revenue
=
Volume
x
Price
Toll Road Revenue
=
Number of cars
x
Average Toll
Airport Revenue
=
Number of passengers
x
Average Charge/Spend
Telco Tower Revenue
=
Number of Tenants
x
Average Rental
Prices rather than earnings are subject to regulation or long-term contracts
1.Earnings are not constrained or protected by regulation
2.Patronage growth has a direct impact on financial returns
RP158
Magellan | 26
Airports - Economic model, impact of covid-19
Magellan | 27
Airport economic model 1.
Passengers
X
Aeronautical Price
=
Aeronautical Revenue +
2.
Passengers
X
Passenger Spend Rate (PSR) i.e. Retail PSR + Car Park PSR
=
Non-Aero Revenue
+ 3.
Funds Invested in Property
X
Rental Yield
=
Rental Revenue TOTAL AIRPORT REVENUE
Less: Operating Costs AIRPORT OPERATING PROFIT Source: World Bank
RP104
Magellan | 28
Impact of the pandemic on passenger demand • Global passenger demand1 declined by: ➢ 52.9% in March compared to March 2019 ➢ 94.3% in April compared to April 2019 ➢ 91.3% in May compared to May 2019 ➢ 86.5% in June compared to June 2019
• The low point was 21 April 2020 • For the month of April: ➢ domestic passenger demand declined by 86.9%; and ➢ international passenger demand declined by 98.4% Passenger demand measured in revenue passenger kilometres Source: IATA 1
RP158
Magellan | 29
Current status of recovery of passenger demand • China domestic passenger demand1 ➢ Declined by 84% in February vs February 2019 ➢ The decline in demand had reduced to 24% in the week of 3 August
• USA – Domestic aviation traffic was down by 95.6% in April and down by 80.1% in June ➢ On 27 July United Airlines said they expect domestic capacity for September to be 40% of 2019 capacity ie a reduction of 60%
• Europe - Airline traffic was down by 98.1% in April and down by 93.7% in June • Asia Pacific – Airline traffic declined by 88.5% in April and by 76.4% in June Passenger demand measured in revenue passenger kilometres Source: IATA 1
RP158
Magellan | 30
Views of airports and airlines about recovery • IATA: Expects world aviation traffic to return to 2019 levels by 2023-2024 • Airports ➢ Aeroports de Paris – Expects a recovery to 2019 passenger levels between 2024-2027 ➢ AENA - Expects a recovery to 2019 passenger levels between 2024-2027 ➢ Fraport - Expects a recovery to 2019 passenger levels between 2028-2031 ➢ Zurich Airport - Expects a recovery to 2019 passenger levels by 2023
Source: IATA, Aeroports de Paris, AENA, Fraport, Zurich Airport
RP158
Magellan | 31
Resilient global passenger growth Global Aviation Passengers (1970 - 2017)
4,500
Annual Passengers (millions)
4,000 3,500 3,000
Global Financial Crisis
2,500 SARS
2,000
Asian Crisis
1,500
Gulf Crisis
1,000 500
9/11
Oil Crisis '79 Oil
-
Source: World Bank
RP102
Magellan | 32
Investment performance & outlook for airports 1. Recovery in passenger numbers expected but significant uncertainty surrounding pace of the recovery 2. Listed airports have delivered investment returns of -39% for the 7 months ended 31 July 2020
Investment returns represent the market capitalization weighted average investment return for Airports that meet Magellan’s definition and are domiciled in OECD markets Source: Magellan research
RP158
Magellan | 33
Toll roads
Magellan | 34
Impact of the pandemic on toll road traffic • Atlantia Week ending
Italy
Spain
France
Brazil
19 April 2020
-84.3%
-81.8%
-83.4%
-43.3%
12 July 2020
-17.5%
-15.7%
-5.9%
-16.9%
2 August 2020
-11.4%
-21.7%
-3.6%
-15.5%
• Transurban Month
M2
Citylink
Clem7
Transurban Group
April
-49%
-56%
-53%
-48%
May
-36%
-45%
-45%
-36%
June
-16%
-31%
-26%
-20%
July
-14%
-48%
-17%
-25%
Source: Atlantia, Transurban
RP158
Magellan | 35
Investment performance & outlook for toll roads 1. Recovery in traffic volumes expected over the medium term 2. Listed toll road have delivered investment returns of -12% for the 7 months ended 31 July 2020
Investment returns represent the market capitalization weighted average investment return for toll roads that meet Magellan’s definition and are domiciled in OECD markets Source: Magellan research
RP158
Magellan | 36
Telecommunications Infrastructure
Magellan | 37
Outlook for Telecommunications Infrastructure Telecommunications Towers benefit from:
• Continued explosion in demand for wireless data; • The need for telecommunications infrastructure to keep up with demand for wireless data
RP158
Magellan | 38
Demand for wireless data continues to increase *
Source: Cisco VNI Global IP Traffic Forecast, 2017-2022. * Vertical axis refers is Exabytes per month.
RP102
Magellan | 39
The demand for Telecommunications Infrastructure
Source: American Towers, AV&Co. Research & Analysis
RP102
Magellan | 40
Communications Infrastructure – Impact on outlook Company Crown Castle
Impact of covid-19 on 2020 results Confirmed AFFO guidance
American Tower
Increased AFFO guidance due to exchange rate fluctuations
SBA Communications
Increased AFFO guidance due to exchange rate fluctuations
Cellnex Inwit
Increased EBITDA guidance due to acquisitions
?
No guidance provided
Source: Magellan research.
RP158
Magellan | 41
Investment performance & outlook for Communications Infrastructure 1. Demand for communications infrastructure is strong and largely unaffected by Covid-19
2. Listed communications infrastructure sector has delivered investment returns of +30% for the 7 months ended 31 July 2020
Investment returns represent the market capitalization weighted average investment return for Communication Infrastructure companies that meet Magellan’s definition and are domiciled in OECD markets Source: Magellan research
RP158
Magellan | 42
Magellan Infrastructure Fund
Magellan | 43
Investment objectives
Achieve attractive risk-adjusted returns over the medium to long term (CPI + 5% through the business cycle)
Protect capital in adverse markets (Strict definition)
SIP003
Magellan | 44
Delivering to our objectives
Magellan Infrastructure Fund to 30 June 2020
1. Consistently delivering returns over the cycle – as at 30 June 2020 One Year (%)
Three Years (% p.a.)
Five Years (% p.a.)
Seven Years (% p.a.)
Ten Years (% p.a.)
Since Inception (% p.a.)#
Magellan Infrastructure Fund
-8.9
4.3
7.7
10.3
12.9
7.6
Global Infrastructure Benchmark
-16.2
-1.4
2.6
6.2
7.9
4.2
7.3
5.7
5.1
4.1
5.0
3.4
Excess
2007* (%)
2008 (%)
2009 (%)
2010 (%)
2011 (%)
2012 (%)
2013 (%)
2014 (%)
2015 (%)
2016 (%)
2017 (%)
2018 (%)
2018 (%)
2020 (CYTD) (%)
Magellan Infrastructure Fund
2.2
-34.1
24.2
11.8
11.2
15.1
17.8
22.4
10.6
6.7
17.4
-0.4
25.5
-13.5
Global Infrastructure Benchmark
6.5
-27.5
10.0
5.7
4.7
9.1
18.5
22.9
-5.4
14.1
14.4
-6.7
25.3
-20.4
Excess
-4.3
-6.6
14.2
6.1
6.5
6.0
-0.7
-0.5
16.0
-7.4
3.0
6.3
0.2
6.9
The inception date is 01 July 2007 inclusive. * Part year performance. Calculations are based on exit price with distributions reinvested, after ongoing fees and expenses but excluding individual tax, member fees and entry fees (if applicable). Returns are denoted in AUD. The Global Infrastructure benchmark is comprised of the following: from inception to 31 December 2014 the benchmark is UBS Developed Infrastructure & Utilities Index NTR Index (Hedged in AUD) and from 1 January 2015 onwards, the benchmark is the S&P Global Infrastructure NTR Index (Hedged in AUD). Risk Measures are after fees. #
DP049
Magellan | 45
Delivering to our objectives 2. Protecting capital in adverse markets – 5 Years to 30 June 2020 5 years ending 30 June 2020, AUD Hedged
Downside Capture
Magellan Infrastructure Fund
Global Infrastructure Benchmark*
S&P/ASX 200 Accumulation Index
0.3
0.7
0.7
0.6
0.6
0.8
0.5
0.8
0.9
Relative to MSCI World NTR Index
Upside Capture Relative to MSCI World NTR Index
Beta To MSCI World NTR Index
* The Global Infrastructure benchmark is comprised of the following: from inception to 31 December 2014 the benchmark is UBS Developed Infrastructure & Utilities Index NTR Index (Hedged in AUD) and from 1 January 2015 onwards, the benchmark is the S&P Global Infrastructure NTR Index (Hedged in AUD). Performance for the Magellan Infrastructure Fund are based on exit price with distributions reinvested, after ongoing fees and expenses but excluding individual tax, member fees and entry fees (if applicable)
DP049
Magellan | 46
Magellan Infrastructure Fund
Sector Exposures as at 31 January 2020 and 30 June 2020 31 January Sector Exposure* Cash, 10% Airports, 17%
Water Utilities, 5%
32% Utilities Communications, 9%
Integrated Power, 9%
Transmission and Distribution, 6%
58% Infrastructure
Gas Utilities, 12%
Energy Infrastructure, 11%
*
Toll Roads, 16%
Rail, 6%
Geographical exposures are by domicile of listing. Exposures may not sum to 100% due to rounding.
DP049
Magellan | 47
• •
•
• •