Magellan Infrastructure Quarterly Update

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Key Takeaways

[00:01:00] The cost of living is a daily topic of conversation. How do you think governments or toll roads in particular are going to navigate this pressure and how might this impact Transurban?

We have seen little direct pushback on toll increases across the toll road sector – that is to say that we have not seen anyone unable to put in place the scheduled toll increases due to political pressure – which largely speaks to the strength of the contracts and the rule of law in the countries in which we invest. Instead, this has manifested in other ways. In New South Wales, for example, the Government has put in place a toll review to look at creating a more balanced tolling structure across the city. Importantly however, the review has recognised the contractual rights of Transurban, and so will have to work with them to find a solution, which means at the very least that Transurban should be no worse off, and may even benefit from the changes.

In France, the government has implemented a concession tax which aims to circumvent the agreement with the Autoroute concession holders that specific taxes won’t be applied to the Autoroute concessions.  Due to our focus on jurisdictions with well-established legal protections, we expect a legal dispute to ensue. While the financial impact is likely to be relatively modest in an adverse outcome, it does highlight some of the more populist attempts we are seeing at the moment.


[00:03:34] Can you provide an update on the resurgence of Chinese travellers and how this compares to the rest of the world?

China's recovery from the pandemic has been slower compared to other developed markets, with the Asia-Pacific region, including China, still lagging behind. This is largely driven by the Chinese outbound market, which has also been impacted by economic weakness in China.

Even where markets are fully recovered compared to 2019 levels, we have seen significant disparity between airport types. For example, airports more focused on short haul leisure travel and low-cost carriers have been doing significantly better compared with those more focused on business travel, long haul travel and legacy carriers – this has played out largely in line with our thesis as to how air travel markets would recover post covid.

One element that hasn’t played out as expected is Chinese passenger spending rates at airports, which has been weaker than we anticipated, albeit this likely reflects softer economic conditions in China. Despite this, some airports have seen significant increases in retail revenue per passenger, such as Paris Charles de Gaulle Airport and Aena, indicating strong consumer spending and improved offerings.


[00:06:57] With the upcoming US election, do you think there will be any impact on the efforts in energy transition?

Looking ahead to the upcoming US election, our current assessment is there is likely to be minimal impacts on the underlying businesses in which we invest. A key debate in our sector will be the treatment of the Inflation Reduction Act (IRA), which includes tax incentives for renewable energy projects. If these incentives were to be removed, it might deter some marginal developments, but the economics of renewables are increasingly driving project viability. Furthermore, the investment opportunity in the utilities sector remains large particularly in grid development. Overall, while policy changes could create some headwinds, in our view they are unlikely to significantly alter the opportunity we see in this space, which we considered to be attractive before the implementation of this policy.


[00:09:20] What in the portfolio are you most excited about?

Some of our larger holdings include Aena, Vinci, and Ferrovial. Aena is the Spanish airport operator which has benefited with rapid traffic growth from the large penetration of low-cost carriers and short haul personal travel. Vinci operates a diversified infrastructure portfolio with the most important being French Autoroute concessions. These are attractive, mature assets with strong cash flow generation and inflation-linked tolls. Ferrovial's portfolio includes the 407 ETR motorway in Toronto and US motorways, offering attractive long concession lives and limited pricing restrictions.

In addition, we see growing opportunity in North American utility companies. Despite being relative laggards in recent years, they present valuation opportunities due to consistent underperformance. Dominion Energy, a large integrated utility in the US, has looked to simplify its business and address debt levels. Despite these challenges being significantly resolved, the valuation has not yet undergone a re-rating in the market.

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