Infrastructure stocks offer long-term growth and shelter from recession
A professional investor tells us where he’d put his money. This week: Nick Scullion, partner at Foresight Group, highlights three favourites
The UK now has positive real interest rates for the first time since before the 2008 financial crisis. We believe this shift is an important signal that the Bank, barring an external inflation shock, is close to the end of its interest-rate hiking cycle.
Two years of rate rises have hit the share prices of firms highly sensitive to increases in the cost of capital, such as property and infrastructure companies. Some are now trading at significant discounts to their net asset values (NAVs), cash flows have remained robust, and we are seeing infrastructure-asset transactions between institutional investors at significantly higher valuation multiples than implied in listed infrastructurecompany share prices.
In addition to these attractive valuations, companies have high-quality predictable earnings streams from the long-dated contracted revenue they generate from their assets. The defensive and predictable earnings generated by infrastructure companies should be rewarded by the market if there is a recession.
Stocks that we like are supported by structuralgrowth trends such as the drive to net-zero power generation, private capital building social infrastructure governments can’t afford, and the digitalisation of the economy, where data traffic and storage is forecast to grow by 25% per annum.
Harnessing the power of the wind
Greencoat UK Wind (LSE: UKW) provides exposure to onshore and offshore wind generation via operating assets, with no development or construction risk. The company has performed well, increasing its dividend for 2024 by 14%. The dividend is twice covered by earnings, with the stock yielding 6% and trading at a 12% discount to NAV. The management of the company also announced a 3% stock-buyback facility. The trust offers access to a high-grade institutional asset base and a dependable, growing dividend.
3i Infrastructure (LSE: 3IN) is currently our favoured stock within the core-infrastructure segment of the market. We are impressed by the managers, who have a strong record of asset optimisation and disposals. These transactions often realise significant value for shareholders, with sale proceeds used to reinvest into new projects. 3IN is well recognised by the market and trades at a premium to its peers. We have used the recent weakness in the company’s share price to increase significantly our weighting towards the stock in our portfolios. 3iN recently sold Attero, a Dutch recycling and waste management company, at a 31% premium to its stated book value, while the shares currently trade at a 9% discount to NAV. We believe the market has fundamentally mispriced the group, considering the value of its underlying assets.
Digitalisation drives growth
Cordiant Digital Infrastructure (LSE: CORD) is well placed to exploit the rapid digitalisation of the economy. It operates a portfolio of data centres, fibre-optic networks and cell towers to facilitate the transmission and storage of data. Cordiant has a strong management team with a record of acquiring high-quality assets at attractive valuations. Cordiant is well placed to exploit the rapid growth in data storage as owners of operational data centres increase lease rates, a trend fuelled by growing demand from tenants and restricted supply of new data centres owing to tighter planning restrictions, higher construction costs and limitations on power usage. Cordiant is highly cash generative, yields 5.5% and is on a 35% discount to NAV.
“The managers of 3i have a strong record of asset disposals”