Friday, 5 August 2011

Publicly listed toll roads outside the USA

Those who work in the domain of highways management and public policy in terms of roads typically are operating in a politically driven environment, where competing interests and priorities are balanced in the bureaucratically based management of publicly owned networks.

However, there is a whole world of privately owned commercial, investment grade road assets, that are tolled, with publicly listed companies.  Some are well known (e.g. Macquarie Atlas Roads, Transurban, Atlantia), but others are less well known.

Writing in Seeking Alpha, Dr Clemens Scholl (who "manages an investment partnership based on value investing principles") has produced an interesting article that summarises and analyses some of these companies outside the US.

The article summarises the state of 23 toll road companies that are publicly listed globally., 8 are Chinese, 4 in Italy, 3 in Australia, 3 in France, 2 in Brazil, 1 in Argentina, 1 in Portugal and 1 in Thailand. Noting that Atlantia in Italy is the largest, with capitalisation of around US$14 billion.

He says:

Key drivers are, for example, the mobility of the population (number of cars), trade volumes between the node points of the highways, and the population of cities joined by them. Competition by other means of transport (airplane, railway) is also an important factor.

He notes the strong growth in toll roads in China, but sees Australian stocks negatively. That is a little unfair, as Transurban has been far more buoyant than other operators, but the Australian picture has been spoilt by Clem 7 in Brisbane, and both the Lane Cove and Cross City Tunnel in Sydney (all of did not offer sufficiently dramatic improvements in travel times for enough vehicles).

In conclusion he says:

Toll road investments offer a very interesting investment opportunity. However, investors have to be careful about the companies they choose to invest in, and pay special attention to highly leveraged enterprises. As the Australian experience shows, high leverage can lead to very ugly outcomes. Today, the Asian toll road operators offer the most attractive valuations, while some operators in Europe are also worth considering. Asian toll roads have the benefit of better economic prospects, more room for future growth in traffic, and a better balance sheet structure. They also currently offer higher dividend yields.

There are plenty of tables in this article, so it is well worth keeping if you are interested in the finances of commercial toll road investment. The key to such investments are the usual factors of not paying too much and there being solid evidence of demand to sustain revenues. Those that have performed badly either relied on highly optimistic demand forecasts or were in Eurozone peripheral countries.

My pick is that there are bargains to be found in the Eurozone periphery, as toll roads in Spain, Portugal, Ireland and even Italy are in some cases looking rather sad in terms of demand.  The opportunities there are to realise some capital, significantly reduce operating costs and seek to maximise revenues within the terms of concession agreements.  However, each much be considered on a case by case basis. Transurban, for example, is quite adept at picking winners, more recently turning the cold shoulder at Clem 7.   Caution should be taken in stereotyping countries, positively or negatively, and with any investment dependent on mostly localised demand, it requires knowledgeable analysis and industry knowledge to pick the wheat from the chaff.

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