Nothing infra-dig about infrastructure’s enduring charms

Comment Martin Flanagan

To adapt the proverb, where there’s muck and exposure to non-discretionary infrastructure spend, there’s brass. Add in the classic business defensive characteristic of high barriers to entry, and you can see why QTS, the Scottish rail renewal and maintenance group, has attracted a moneyed suitor. The Lanarkshire-based business is being acquired for £80 million by the UK Aimlisted engineering services group Renew Holdings, which has a similar yet complementary business model.

In some ways, it must be a nice backstop for QTS to have Network Rail (NR) as a prime customer (about nine-tenths of its revenues in the financial year to endmarch 2018).

In terms of infrastructure renewal and maintenance, NR must be a massive boon for the Scottish group. The deal with Renew Holdings has sound logic.

In QTS, Renew gets a well regarded brand in the rail market that increases its UK footprint and market share; in return QTS gets a parent with deeper pockets that should help the pace of its expansion.

Rail maintenance is a highly regulated sector and will remain so. While that may mean herbivorous profit margins at times (think Carillion), established and apparently well run businesses like Renew and QTS have an inherent advantage.

They are known knowns to their clients. That reassurance is likely to be buttressed by the news they are getting together, with the extra synergies and merged expertise that should bring. President Trump has always been a big friend of Big Oil. And he really is the gift that keeps on giving. Although not his main purpose, Trump’s defenestration of the Iran nuclear deal has sent the oil price soaring as the looming sanctions suggest a squeeze on that country’s key economic earner.

As such, oil stocks have been boosted as markets sense the recovery of the energy industry after the lean years of 2015 and 2016 could get an extra fillip.

Caution is called for, however. We are in serious geo-political waters in the Gulf, with a riptide every bit as threatening as Chinese claims to the South China Sea and the riddle of North Korea.

If destabilisation and an Iranian plutonium crisis is triggered, it might trump the short-term benefits for the oil industry.