CFS WS Glb Listed Infrastructure-Class A (FSF1241AU) Report & Performance

The Fund initiated a position in Southern Company, a large-cap, regulated US utility. Southern is run by a well-regarded management team and operates in a constructive regulatory jurisdiction with robust economic growth. The stock has underperformed in recent years, as project delays and cost overruns at the Vogtle nuclear power plant in Georgia have eroded the premium compared to peers that it previously traded at. We believe the stock now has the potential to trade back up to a premium, as the plant nears completion.

A holding in US utility Sempra Energy, whose assets include substantial US LNG export facilities on the US Gulf Coast, was sold after strong share price gains since the position was established in late 2021. The company has been a beneficiary of increased global demand for US energy exports over the past year

The Fund invests in a range of listed infrastructure assets including toll roads, airports, railroads, utilities and renewables, energy midstream, wireless towers and data centres. These sectors share common characteristics, like barriers to entry and pricing power, which can provide investors with inflation-protected income and strong capital growth over the medium-term.

The outlook for the asset class is positive. Balance sheets and dividend payout levels are generally healthy, and appear well placed to weather a deteriorating economic backdrop. We are conscious of potential headwinds in the form of higher interest costs, and elevated regulatory and political risk. Overall however, earnings from this space are expected to be more resilient than those of global equities, owing to the essential service nature of these businesses, and their typically regulated / contracted earnings streams.

The Fund initiated a position in Duke Energy, a large-cap, vertically integrated electric and gas utility based in North Carolina. The company’s assets include a substantial, well-diversified fleet of electricity generation assets and over 400,000km of distribution lines across a service territory covering 270,000 square kilometres. Its rate base is forecast to grow at a compound annual growth rate of 7% up to 2032, driving Earnings Per Share (EPS) growth of between 5% and 7% per annum and supporting a ~4% dividend yield. This stock, which is currently trading at undemanding valuation multiples, was added to the portfolio on the appeal of its stable earnings profile and defensive attributes.

Japanese passenger rail operator West Japan Railway was divested after the easing of travel restrictions for tourists and business travellers entering Japan, along with falling COVID case numbers, led to a period of share price outperformance. This moved the stock to a lower ranking within our investment process.

The Energy Midstream sector performed relatively well, aided by strong performance from US operators with exposure to Liquefied Natural Gas (LNG) export markets. Japanese passenger rail stocks gained as travel restrictions into the country were eased. Airports also fared reasonably well, as June quarter earnings numbers highlighted positive operating leverage to improving passenger volumes.

However the interest rate sensitive Towers / DCs and Water / Waste sectors underperformed. During the September quarter the US 10-year bond yield increased from 3.0% to 3.8% – its highest level in over a decade.

The Fund initiated a position in Targa Resources, one of North America’s largest independent energy midstream companies. Targa’s strategically located energy infrastructure footprint is focused around the Permian basin in Texas. The company processes and transports Natural Gas Liquids (such as propane and butane) for use in US and international markets. Having simplified its corporate structure and strengthened its balance sheet over the past two years, Targa now appears well positioned to generate strong free cash flow and carry out additional capital management initiatives, including increasing capital returns to shareholders.

A position in US gas utility Atmos Energy was sold following a sustained period of outperformance as its share price recovered from the aftermath of the February 2021 winter storm. At current valuation multiples, mispricing has become less evident.

Energy midstream stocks rallied on expectations that Europe’s need to reduce or eliminate its dependence on Russia energy would buoy US oil and natural gas production levels. This is likely to support utilisation rates of North American pipelines and storage assets, and boost demand for LNG exports. Airports climbed as coronavirus travel restrictions and isolation requirements eased in many regions (although China proved a notable exception to this). Railroads gained on the view that higher commodity prices would prove supportive of North American bulk volumes (and freight rail operators). Japanese passenger rail also recorded modest gains as domestic travel restrictions were lifted. Towers / Data Centers lagged in January and February, as concerns for higher bond yields overshadowed the structural growth theme of increasing demand for mobile data, before recovering some ground in March.

The Fund initiated a position in Danish-listed Ørsted, a leading global renewables developer and operator with a focus on offshore wind. The majority of Ørsted’s current projects are located in the North Sea, but the company also has a growing onshore wind and solar business in the United States, and growth ambitions in Asia. Government subsidies or tax incentive structures underpin stable returns from the company’s projects over long time frames, regardless of underlying energy market conditions. Net zero commitments and a growing focus on energy independence are expected to underpin structural growth in demand for the company’s developments over coming years. A position in Canadian National Railway was divested on a relative valuation basis; the stock is now trading at levels above peers and above its own long-term average valuation multiples. The Fund Manager prefers US operators such as Norfolk Southern, which is trading at cheaper multiples and has greater scope to improve operational efficiency.