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ValueLine: Infrastructure

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ValueLine: Infrastructure

You would think that a country so reliant on infrastructure would offer good investment opportunities for value investors. Unfortunately there are depressingly few opportunities. Read Roger’s article at www.eurekareport.com.au.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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14 Comments

  1. Ric
    :

    ARB are selling a car fridge that uses the same compressor as the famous Engel and Waco models. It is much cheaper (I don’t remember how much cheaper but in the order of 20 to 40%)..I saw one when I was shopping for a fridge back in March but didn’t buy it because there were so many other copies of Engel and Waco that are no where near as good (different compressor..makes all the diff as it determines efficiency which is so important running on car batteries. As far as I know there are now only three companies in the world selling these danfoss compressor car fridges and ARB’s are cheaper….If ARB are doing this across their range, to me they look good..On the down side I can’t find an electric winch on their web site…I’m sure they’d sell them……

    I’m off to Supercheap….

    • Rob Walker
      :

      Hi Ric,

      Under 4 x 4 Accessories you will find about 16 Electric Wiches to choose from
      (warn winches) very good quality. I hope you are just buying car shampoo at supercheap.
      I dont work for ARP, just a small shareholder and I know they sell electric winches.

      Cheers

      Rob Walker

  2. Lloyd
    :

    Roger,

    The investment case and the problem with infrastructure in the final analysis comes down to one term, that of the price you pay for it.

    For the last decade the infrastructure play has been hyped beyond reasonable bounds. It has been the major playground for rent seekers, extortionists and Ponzi scheme artists. The problems in this regard are two fold:

    1) The role of the leverage, plus hot money, and the likes of MQG and BNB in inflating the cost of existing infrastructure assets beyond economically rational pricing has lead to negligible, even negative returns for investors in existing infrastructure.

    2) The flawed Public Private Partnership (PPP) model, promoted by State Governments advised by the likes of MQG, has dramatically increased the cost of new infrastructure to economically nonviable levels through the bidding process and the associated massive payments to Government (on top of the inflated capital cost) for development and operating rights. This has been done not with the primary objective of delivering cost effective infrastructure, but rather with the primary objective of enriching the project proponents.

    Like just about everything, infrastructure is a great investment if acquired at the right (read low) price!

    However, acquired at a high price using large licks of debt, in complex trust structures and via offshore entities using opaque reporting and financial accounting (as was the case for the MQG and BNB infrastructure trusts) it has proved to be a quite predictable economic disaster for investors.

    To paraphrase Buffett: Price for infrastructure is what you pay, value is what you get.

    Regards
    Lloyd

    • Roger Montgomery
      :

      Thanks Lloyd…and that says nothing about the social responsibility obligations of the government’s role, in PPPs, that are obfuscated. I am delighted that others are able to say exactly what I might think – and might say, but for the upbringing that told me to say nothing if there was nothing nice to say. Good assets at bad prices (and in poor structures) are not good investments. No amount of accounting can make a bad investment good.

      • Lloyd Taylor
        :

        Roger,

        I appear to have had a similar upbringing in terms of the “say nothing but nice” ethos. It has taken me quite a few years witnessing the financial rogues and politicians (the two terms are in fact near synonymous in the modern world) exploit that ethos to the detriment of the community at large.

        As a result, I have overcome the “say nothing but nice” ethos and now call it like it is. To paraphrase Ben Chifley, it is necessary to fight (speak) for the right in order that truth and justice will prevail.

        Silence (and implicit denial) is counter productive under the circumstances that have come to pass under the infrastructure investment and PPP models, which if continued will drive this country to the brink of economic and social ruin.

        Regards
        Lloyd

  3. Ashley Little
    :

    Hi Roger,

    Could not agree with you more,

    I have heard people say that you cant value infrastructure by the normal metrics due to the large depreciation expense. Which should be ignored.

    I think it was Buffet who said someting like If you prepaid staff wages for 10 years would you ignore that.

    Buffet was refering to the fact that depreciaition is a very real expense and often more than disclosed in the accounts.

    I think that some people just have not learned a good lesson from the global financial crisis. Just say no to infrastructure stocks.

    Thanks again Roger great summary

  4. Brad S
    :

    Hi Roger,

    Interesting article. Would you consider SWL an A1 or A2 company in infrastructure. Could you inform us of your MQR and 2010/2011/2012 intrinsic values. Tried to get through last Thursday night on YMYC however no such luck.
    Thanks again,
    Brad

  5. Greg Mc
    :

    Morning Roger,
    In almost all of the articles you can read in the papers or tip sheets about infrastructure stocks, it appears to me that there is an almost universal concentration on only one part of the equation – the usage bit, eg. passenger numbers at Sydney Airport up 5% or some such – as if that’s all you need to know. The amount of debt weighing down these companies is either glossed over or not mentioned at all, and one virtually never hears the words ‘cash flow’.

    I get the feeling that because of the *relatively* predictable nature of the revenue of some of these stocks, that is all that is required to call them ‘defensive’ and other metrics that would be poison to the ratings of other stocks get ignored.

    It’s like paying 3 times the market rate for an investment property using mostly debt to do so where there’s no prospect of capital appreciation and the rental income is not sufficient to cover the interest on the debt, maintenance expenditure and pay you something, but the agent says “Yes, but you’ve got a really stable tenant”.

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