Earnings down as private money circles infrastructure: Reporting season roundup |
Tweet | ![]() |
<p><strong>Lewis Jackson</strong>: August was an exciting month for the utility space with most of the major names reporting and the Board of Spark Infrastructure, recommending that shareholders accept an offer from pension funds, and private equity groups. I'm joined today by Morningstar's, Adrian Atkins to discuss how the sector went this reporting season.</p>
<p>Adrian, thanks for being here.</p>
<p><strong>Adrian Atkins</strong>: Hi, Lewis.</p>
<p><strong>Jackson</strong>: Let's start at the sector level. What were some of the themes you noticed coming out from the names that you cover?</p>
<p><strong>Atkins</strong>: Well, overall, it was a pretty weak reporting season. Most of the stocks that I cover reported earnings down a bit on the prior year. We're still seeing some impacts from the Coronavirus. So particularly toll roads, they continue to report soft traffic volumes and earnings. Logistics companies were also hit by the pandemic earlier on, but they are doing much better now. We've got container volumes recovering, bulk export volumes, like resources in agricultural products, they've been pretty strong. And we've also seen logistics companies increasing prices for customers. So that's helped their profits.</p>
<p>In terms of the utilities, what we've seen is AGL and Origin, they weren't impacted really by the virus, but they've got other issues to deal with including high fuel costs and lower wholesale electricity prices. So their profits were down. The regulated utilities the more kind of infrastructure utilities, bit like Spark Infrastructure and AusNet Services, their earnings are also under pressure at the moment from falling tariffs due to the regulatory process. Meanwhile, over in New Zealand, conditions are a bit better. Utilities over there had a relatively flat year overall, as strong wholesale electricity prices offset headwinds from lower hydroelectric generation and higher fuel costs.</p>
<p><strong>Jackson</strong>: So there's quite a varied landscape there. When you look across it, were there any standout performances, anything unexpected that investor should keep an eye on.</p>
<p><strong>Atkins</strong>: The logistics companies all did well and better than I was expecting. I was expecting them to grow earnings and they did a bit better. Things like Qube, the New Zealand based Port of Tauranga and Aurizon Holdings. They were able to grow their earnings despite headwinds to international trade. As I mentioned before, it was because of things like growth in resources exports and agricultural products and also the ability to push up customer tariffs. The other one that surprised, well didn’t surprise any upside but did very well compared to peers at least was Contact Energy. So that's one of the New Zealand utilities. Contact has a very flexible generation fleet. So it was able to increase its output amidst high electricity prices and thus boosted profits.</p>
<p><strong>Jackson</strong>: So uncertainty around the Delta variant sort of maintains, you talked about how certain names in the transport and logistics sector have been struggling because of that, was there any guidance from these companies on what they expect over the next six months as the virus progresses?</p>
<p><strong>Atkins</strong>: They've all provided, well, most of them provide earnings guidance looking ahead. In terms of the Delta variant I guess once again, it's just going to be the toll roads who are going to be impacted. Other businesses seem to be coping fairly well with the Coronavirus and the lockdowns.</p>
<p><strong>Jackson</strong>: And turning to AGL, one of the names under coverage a best idea for several months, it's been struggling recently, what were some of the highlights from its report?</p>
<p><strong>Atkins</strong>: Well, profits are down so there's not that many highlights. But we were expecting this, and in fact, profits are going to fall again next year. But we do still expect a turnaround over the medium term. Because we're seeing higher and more volatile electricity prices. And if that kind of upward trend continues, then AGL's earnings should also trend higher. But it will take a little while to flow through just because of multi-year sales contracts and hedging. And our thesis, in large part is just based on the fact that coal and gas prices have increased, and we think at least gas prices will remain well supported. And that just pushes up the cost of running power stations. And that's a plus for AGL because AGLs got a lot of cheap coal supply contracts for the long term. So it's going to continue producing electricity cheaply while most of its competitors face rising costs.</p>
<p><strong>Jackson</strong>: And turning back to the sector more broadly, there's been lots of interest from pension funds and private equity groups for utility and infrastructure assets over the last several months. What's your reaction to that? And what do you think the outlook is? Are there any listed names that could be targets next, you think?</p>
<p><strong>Atkins</strong>: Yeah, I think it all stems from the fact that bond yields are so low, you know, with record monetary policy, stimulus from all the global central banks, we've got low bond yields. In inflation adjusted terms, they're probably negative for a lot of debt. So big investors, like pension funds are having to look for alternatives. And a good alternative for them, long term cash flows is infrastructure stocks. So we've seen a couple of takeover offers in the infrastructure space in recent months, including for Spark Infrastructure, which you mentioned, and I cover. So it's got a takeover offer from some Canadian pension funds. And Spark's directors have accepted it, subject to independent expert report, and no higher bid. So for us, though, we're not 100% convinced that the offer is good enough, it's only a 13% discount to our underlying fair value estimate, which isn't a huge premium, considering how few infrastructure stocks are left. So we'll have to consider all that information as it comes out, and we'll make a recommendation on that later in the year.</p>
<p>As for what could be next as a takeover target, there's not—I don't think there's that many, you know, because companies like Transurban, I think that's just too big. AusNet Services is already 51% owned by a Singaporean and a Chinese state-owned entity. Something like Aurizon would probably be unappealing to a lot of investors because of its coal exposure. So I think maybe Atlas Arteria or maybe APA Group, but on the other hand, APA Group had a takeover offer knocked back by the government on security grounds, so that's a bit unclear as well.</p>

19/05/2022 Local investors were spooked after US retail giants Target and Walmart plummeted overnight as rising prices hit margins and inventory.

19/05/2022 On his recent visit to Australia, Morningstar's global chief investment officer Dan Kemp talks investing narratives, confronting the growing list of reasons to be concerned about markets and sustainable investing.

19/05/2022 Worries about inflation’s toll on earnings sparks Wednesday’s 4% plunge, but stocks are now far undervalued.

18/05/2022 One of the big themes of the year has been the value comeback. What is behind this resurgence after a pretty dismal period, and should your portfolio be tilting in its direction?

11/05/2022 Here's what investors who are worried about a recession should consider today.

11/05/2022 Morningstar analysts have identified TPG telecom as the most undervalued telecom stocks in the ASX 200 detailing multiple catalysts for earnings recovery and growth.

29/04/2022 Exclusive: Hermitage Capital Management CEO Bill Browder talks Putin, Russia, and the next six months for Ukraine

28/04/2022 Inflation, rising interest rates, geopolitical risks, and other things to keep your eye on.

27/04/2022 Morningstar's analyst talks about the Buffett's recent deals, what the stock is worth, and whether Berkshire will pay a dividend any time soon.

31/03/2022 Supply disruptions following Russia's invasion of Ukraine are forcing analysts to consider the possibility elevated prices persist.

30/03/2022 Rising interest rates, strong economic growth and cheaper valuations are driving banking stocks ahead of the broader market.

28/03/2022 Where are entertainment and streaming services headed?

24/03/2022 Problems in global supply chains are an opportunity for WiseTech as its logistics company customers move to replace old software.

23/03/2022 Markets focused on floods and bushfires are missing how insurers are cutting costs, doing more digitally and are looking down the barrel of a lift in investment income.

17/03/2022 Morningstar Investment Management's global CIO Dan Kemp explains why well-intentioned investors desperate for peace in Europe are making dangerous market calls

15/03/2022 Knowledge of the local market, strong branding and a growing subscription service should see the undervalued retailer retain market share in the rapidly growing online sales category, says Roy Van Keulen.

08/03/2022 Higher inflation, rising interest rates and booming commodity markets are driving a major rotation away from the post-pandemic winners, says Tim Murphy, Morningstar director of manager selection.

03/03/2022 Regulators are likely to be less lenient now the buy-now-pay-later sector is part of the fabric of Australian payments.

23/02/2022 Strong commodity prices, cheap valuations and a head start on interest rate hikes means emerging markets are set for strength, says Dr. Joseph Lai of Ox Capital.

23/02/2022 A belligerent speech from a president signalled the start of the latest phase of Russian agression last night, causing markets to wobble and investors to wonder.

15/02/2022 In an extended interview, Morningstar's Peter Warnes discusses the bear market in US technology stocks, interest rates and growth and his approach to investing outside the US and Australia.

13/02/2022 Morningstar equity analyst Shaun Ler explains why he see valuation upside high for MFG even as shares lose steam.

31/01/2022 The Chinese lunar year is almost over, and what a ride it's been. Morningstar speaks to JPMorgan Asset Management strategist Mike Bell about what's ahead.

23/01/2022 Christine Benz discusses how investors should handle the turmoil, whatever the life stage.

18/01/2022 Empty shelves will negatively impact supermarkets in the second half of fiscal 2022 but the impact on long-term earnings is minimal, says Morningstar analyst Johannes Faul.

17/01/2022 Bank earnings, house prices and China risk: Our experts and analysts discuss what they've got their eyes on in 2022.

24/12/2021 Our experts and analysts weigh in on what mattered for investors last year.

21/12/2021 New products, lower fees and a portfolio of undervalued stocks set to help the fund manager right the ship.

10/12/2021 And how does it match up against gold?

10/12/2021 Australian miners to be among the last standing as coal use fades.

08/12/2021 Rebalancing your portfolio is one of those beneficial habits that’s easy to let slide. But year-end is an ideal time to check how your portfolio is tracking against your target asset allocation.

03/12/2021 The gold-rated fund manager shares three ideas with long-term potential.

01/12/2021 Long-term investor sees opportunities where businesses are moving towards a zero-carbon future faster than governments.

30/11/2021 To understand your fund, get to know its underlying index.

29/11/2021 These companies are set to profit from the move to clean energy, says Lazard.

24/11/2021 The results of the COP26 climate summit suggest coal demand is likely to persist for longer than expected.

17/11/2021 And how investors can protect their portfolios.

08/11/2021 Morningstar thinks these moaty companies will remain resilient in the face of inflation and ongoing supply chain challenges.

05/11/2021 Morningstar maintains fair value despite a fall in margins and slower progress on cost reductions.

19/10/2021 These new US-listed exchange-traded funds will invest in bitcoin futures, not bitcoin itself.

15/10/2021 The ESG outperformance narrative is flawed, new research shows.

06/10/2021 Investors may need to hold more growth assets over the coming years, says Morningstar's Jody Fitzgerald.

01/10/2021 And how G8 Education and Link Administration are positioned for long-term success.

30/09/2021 What Reporting Season August 2021 told investors about the health of the financials sector.

28/09/2021 a2 milk is an opportunity to be greedy when others are fearful.

23/09/2021 Covid's winners and losers are returning to their prior trajectories.

21/09/2021 Sequence-of-returns risk matters for both retirees and savers. Here's why.

20/09/2021 Analysts expect the sector to recover to pre-Covid trading levels once borders reopen.

15/09/2021 Rising customer deposits and access to cheap funding helped Australia's banks stave off net interest margin pressure, but analysts see warning signs.

14/09/2021 Morningstar's Hortense Bioy on how to spot greenwashing and how to avoid it.

13/09/2021 Utilities and infrastructure names battle the impact of covid as private equity and pension funds circle.

10/09/2021 Hydrocarbons poised for a comeback.

09/09/2021 Providers have lifted prices after years of a debilitating chase for subscribers at all costs , says Morningstar's Brian Han.

08/09/2021 What shorting ETFs means for long-term investors.

07/09/2021 Morningstar senior analyst Grant Slade says Brambles secular growth trend is intact despite nearterm headwinds. He discusses results from the building and construction materials sector.

03/09/2021 Miners bask in the glow of iron ore prices while bargains remain in coal.

23/08/2021 Post-merger Woodside would be well positioned to deliver on the value we've seen for a long time, say Morningstar analysts.

16/08/2021 But the sector lacks uniformity, says Morningstar's Christopher Franz.

11/08/2021 Higher wholesale electricity prices bode well for AGL, according to Morningstar senior equities analyst Adrian Atkins.

11/08/2021 Morningstar FundInvestor editor Russ Kinnel describes some direct and indirect hedges for inflation protection.

10/08/2021 Copper and iron ore have benefited materially from China’s stimulus and the developed world recovery. But Morningstar analyst Mat Hodge see these benefit as transitory.

05/08/2021 We believe the transaction has a high chance of succeeding.

03/08/2021 The industry still has significant growth potential.

03/08/2021 Is one of the biggest sponsors of the Olympics positioned for an all-electric future?

23/07/2021 Morningstar's Lex Hall talks micro-cap stock picks with Carlos Gil, chief investment officer at Microequities Asset Management.

22/07/2021 Mornngstar's Lex Hall catches up with Carlos Gil, chief investment officer at Microequities Asset Management.

21/07/2021 The head of Australian small and mid-cap stocks at First Sentier Investors has her eye on ARB, Breville and IDP Education.

20/07/2021 The strong performances of global stock markets in 2020–21 are unlikely to be repeated in the coming year says Morningstar's Peter Warnes.

12/07/2021 Morningstar equity analysts warn that equities remain overvalued despite Australia's strong economic recovery.

08/07/2021 Private equity is an exciting area for investors, with lots of hotly-tipped stocks. But there are risks to be aware of, says Pitchbook analyst Dylan Cox.

08/07/2021 Warryn Robertson is looking at French infrastructure, retail pharmacy and tax services.

06/07/2021 Australia's largest banks have excess capital because they cut dividends, were more conservative on lending, divested assets and raised equity last year. Morningstar's Nathan Zaia thinks most of it should be returned to shareholders.

02/07/2021 PEXA burst onto the ASX this week in the biggest float since 2019. Morningstar's Gareth James gives his take on the company's future growth prospects.

30/06/2021 Iron ore prices have been on a tear, boosting the profits of Australia's top miners. How did we get here and is the only way up? Lex Hall sits down with Morningstar's Mat Hodge.

28/06/2021 Morningstar has recently initiated coverage of a food delivery app and a consumer finance product.

24/06/2021 Meeting the deluge of demand is the biggest task for US companies, says Bell Asset Management's Ned Bell.

22/06/2021 Are there still opportunities in the biotech sector now the covid-19 vaccine roll out is underway? We ask International Biotechnology Trust manager Ailsa Craig

21/06/2021 Morningstar's director of Asia equity research is confident the e-commerce giant will bounce back.

18/06/2021 A wide moat and attractive dividend potential are among the key takeaways of Woolworth's decision to demerge from the liquor and hospitality group.

15/06/2021 Lazard Asset Management's Warryn Robertson explains how companies in the Global Equity Franchise fund have adjusted to covid, and assesses the threat of rising inflation.

11/06/2021 Magellan's Craig Wright tells Emma Rapaport why it is leading the charge in the active ETF arena and how its global equity product works.

10/06/2021 Callum Burns of ICE Investors explains his conviction in pharmaceutical distributor Ebos, PSC Insurance Group, and elite sports analytics provider Catapult.

09/06/2021 Callum Burns explains how ICE Investors identifies companies with original products and sticky customer bases.

08/06/2021 They’re building an empire.

07/06/2021 A year ago the oil price went negative. How have oil giants handled the past 12 months and what's the outlook from here? Morningstar analyst Allen Good explains.

04/06/2021 As the investment world goes crazy for crypto, Morningstar Investment Management's Dan Kemp explains what to consider before putting it in your portfolio

03/06/2021 The airline sector is set to recover as international travel resumes. Morningstar analysts think Wizz Air offer the best opportunity among low-cost carriers.

28/05/2021 4D Infrastructure's Sarah Shaw outlines the investment case for Spanish multinationals Cellnex, and Iberdrola, and the potential of Mexican airports.

28/05/2021 The SEC continues to sort out its regulatory concerns.

27/05/2021 We’re raising our fair value as sales hit new highs—but investors need to put it in perspective, says Andrew Willis.

25/05/2021 Covid-19 has enhanced rather than impeded the future for global infrastructure, says Sarah Shaw of 4D Infrastructure.

24/05/2021 Tribeca's Jun Bei Liu also explains why she sees opportunity in sleep apnea specialist ResMed as well as Treasury Wine Estates.

19/05/2021 American Century Investment's Patricia Ribeiro sees growth in Chinese battery technology, biologics, and building materials in Latin America.

18/05/2021 Robotics is a fast-growing area of tech, creating opportunities in medical, logistics and life sciences sectors and much more.

18/05/2021 Square's Bitcoin purchase is more marketing than operations

10/05/2021 If Elon Musk ends up delivering, we might need to raise our fair value to US$1500 a share.

07/05/2021 Banks and resources are poised to deliver dividends, and Treasury Wine Estates and BNPL are worth a look, says Jun Bei Liu of Tribeca's Alpha Plus long/short fund.

05/05/2021 Digital banking, ecommerce and 5G are among the key trends set for rapid growth, says Patricia Ribeiro of American Century Investments.

04/05/2021 Analysts have made changes to the fixed interest, property, cash and equity allocations of Morningstar's Model ETF Portfolios to take advantage of the current market environment. They've also refreshed some of the funds in the portfolio.

30/04/2021 The stock market and the economy are not the same. Here's why.