SINGAPORE (Oct 28): Infrastructure is expensive and the payback takes a long time, making it a long-term investment. As evidenced by the experience of investors in Singapore, investing in infrastructure can be challenging. For instance CitySpring Trust, which initially owned a stake in a desalination plant and City Gas, had to merge with Keppel Infrastructure Trust because the former’s returns were not optimal for yield investors. Hutchison Port Holdings Trust, which owns ports in China and Hong Kong, has been hit by falling throughput and is now a fraction of the price of its IPO, back in 2011. Chart 2 shows that HPH Trust has the worst profitability among infrastructure, construction and engineering stocks in the region. At any rate, ports and airports take years to conceptualise and build, and their returns are phased in gradually.
The profitability of construction stocks such as KSH Holdings, Lian Beng Group and Wee Hur Holdings is relatively low, as evidenced by their position on Chart 2.
Based on fundamental scores, which incorporate safety metrics such as yields, profitability, historical performance and sentiment, Hong Kong-listed Yuexiu Transport Infrastructure and NWS Holdings appear to be undervalued. Even then, their growth outlook is likely to be very modest.
Taking its toll
Yuexiu Transport Infrastructure is a toll collector that ticks the boxes for cash flow and yield. The stock’s earnings yield, operating cash flow yield, free cash flow yield and dividend yield are 11.1%, 24.6%, 22.3% and 5.7% respectively, and look attractive when measured against the riskfree rate in China of 3.2%.
Some 77% of Yuexiu’s assets comprise operating rights granted by local government authorities, mainly in Guangdong province and Southern China, to operate toll highways and bridges for 20 to 30 years. Eventually, on expiry of the operating rights, these toll highway and bridge assets will have to be returned to the local government authorities, at no compensation to the company. From an accounting basis, the operating rights are amortised based on expected cash flows for the highways and bridges over 20 to 30 years.
Yuexiu’s profitability metrics also look better than peers. Return on equity (ROE) is 12.2%, return on assets (ROA) 5.4%, and profit and cash flow margins are 37% and 80.9% respectively. For margins, the larger the number, the better. On the other hand, for ratios such as EV/Ebitda, the smaller the number, the better. Yuexiu’s EV/ Ebitda is 7.5 times compared with its peer average of 14.2 times.
Other investment metrics such as liquidity, interest cover, debt and gearing are all comfortable. The downside is that net tangible assets per share is negative because the company has listed a large portion of its assets as intangibles. These intangible assets include Yuexiu’s operating rights for its highways and bridges. Hence, although price-to-net asset value is 1.07 times, price to NTA is a negative figure.
Sentiment on this stock appears to be upbeat because of its attractive fundamentals. Yuexiu has a consensus rating of 4.33 (5 being a strong “buy”) and price target upside of 12.8% from its current trading price from analysts, based on Bloomberg.
New World’s building blocks
New World Development’s 61%-owned NWS Holdings checked all the right boxes in our recent screening of infrastructure companies. NWS is a conglomerate that operates toll roads in China, some of which it has partial stakes in. It also builds/owns and operates environment projects such as wastewater treatment plants and solar power plants, as well as ports and logistics assets such as warehouses.
With its parentage, it is no surprise that NWS is liquid (its current ratio is 2.2 times and interest cover 6.6 times), with negligible gearing, as its cash and bank balances are almost the same as its debt. Price-to-book and price-to-NTA are 0.82 times and 1.01 times respectively. ROA and ROE are 5.2% and 7.6% respectively. Profit and cash flow margins are 15.8% and 16.7% respectively.
Because of its relatively stronger valuation metrics, it is cheaper than other stocks in the sector. For instance, its EV/Ebitda of 12.5 times is lower than the peer average of 14.2 times. Yields are more attractive too. Earnings yield, operating cash flow yield, free cash flow yield and dividend yield are 8.7%, 9.7%, 7.2% and 4.9% respectively. And, as Chart 4 shows, NWS has had a consistent performance in revenue, net profit, operating cash flow and free cash flow over a five-year period.
Among the Singapore stocks, Hock Lian Seng Holdings scores well in liquidity and solvency, profitability and yields. However, there is no analyst coverage, and it has not always shown consistent earnings growth. In 1HFY2019, Hock Lian Seng reported a 21.4% y-o-y decline in earnings to just $3.5 million and negative free cash flow. On the other hand, the company has no debt, and is trading at 0.88 times its book value of 38.4 cents.
