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Infrastructure to power the Aussie economy

Nicki Bourlioufas  |  27 Nov 2017Text size  Decrease  Increase  |  
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The "engine of growth" for the Australian economy over the coming years will be infrastructure, which will help to maintain economic growth at around 3 per cent, and will benefit building, engineering, and professional services companies, according to the experts.

According to research from Macquarie Wealth Management, Australia is heading into a mini infrastructure investment boom, just as a housing boom comes to an end.

Over the next four years, the federal government will spend at least $16 billion on infrastructure investment and the states will separately spend $221 billion, totalling around $237 billion.

"But the amount spent will likely be at least $323 billion as planning advances on major projects that haven't yet received full funding," said a Macquarie Wealth Management research note.

"We estimate that the weakness in housing over the next two years will be offset just by the work that has already started in roads. Other sectors and roadwork further down the pipeline will easily cover the risk of a sharper housing downturn … and add to growth," said the research paper.

There is around $16.6 billion of work-in-hand for roads, and $5.5 billion for rail, both near record levels and with more in the pipeline, Macquarie said. Road infrastructure alone is expected to rise from around 0.9 per cent of GDP to 1.5 per cent of GDP over the next few years.

Craig James, chief economist at CommSec, agrees that the boost to public investment will offset the slowdown in residential construction and support economic growth. "As a result, GDP growth should be solid near 3 per cent over the next few years," he said.

Infrastructure spending will be solid through to 2023 with the peak around 2020. "There is a raft of projects across Australia, especially covering transport--roads, tunnels, railways and airports," said James.

In addition to transport, other areas where investment is growing include water supply and sewerage, electricity generation, and telecommunications investment, which has also been increasing for some time with the NBN rollout.

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In a recent speech, Luci Ellis, the assistant governor (economic) at the Reserve Bank of Australia, said the program of public works in the pipeline is now much higher than usual, which is stimulating investment across other sectors as businesses prepare for the boom in spending.

"Infrastructure work … supports activity in private firms, because they are doing much of the work on these projects on behalf of the public sector. And we are hearing from our contacts in industry that it is also spurring private businesses to invest in new equipment, to support that activity," said Ellis in a recent speech.

"Better public infrastructure is also thought to boost productivity in the economy more broadly. Transport infrastructure seems to be especially good at this. Compared with the previous upswing in infrastructure spending a decade ago, transport projects are a larger share this time around."

Macquarie said the infrastructure investment boom will benefit several stocks, including builders, material suppliers, operators of infrastructure, and providers of maintenance services.

"Our preferred stocks are CIMIC Group (ASX: CIM), Boral (ASX: BLD), Adelaide Brighton (ASX: ABC), Downer EDI (ASX: DOW), WorleyParsons (ASX: WOR), Transurban Group (ASX: TCL), Lendlease (ASX: LLC) and Mineral Resources (ASX: MIN). Most of these stocks reported solid growth in their order books during reporting season," said Macquarie.

"Infrastructure operators such as Transurban and Spark Infrastructure (ASX: SKI) probably offer the best returns for investors according to our analysts. Transurban reported that it had a $9 billion development pipeline at the FY17 results.

"The business also mentioned that it was in exclusive negotiations with proponents for the West Gate Tunnel Project (valued at between $3.5 to $4 billion) along with the 98 Express Lanes project in the US.

"Boral is one of our preferred picks in the sector because it is directly benefiting from road construction in NSW. CEO Mike Kane recently said he expects the infrastructure boom to last up to 10 years after previously stating it should last between five and six years."

Construction group CIMIC reported a $1.1 billion increase in work-in-hand to $35.2 billion in 2016-17, equivalent to two years' revenue.

"The company also mentioned it was tendering or short-listed on several major projects around Sydney, including the Central train station renewal. The company said it would be tendering on $320 billion of projects that were coming to market in 2018 and beyond," the Macquarie research note said.

Lendlease said engineering activity was accelerating when reporting its full-year results in August. The company's construction division accounts for around 24 per cent of its earnings and work-in-hand is valued at $20 billion and Lendlease is the preferred bidder on $10 billion of work globally, according to Macquarie.

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is a Morningstar contributor.

This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. 

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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