Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Sandy Cross, associate director of HSBC Investments (UK)
I was studying A-level economics during Mrs Thatcher’s late 1980s boom and the capacity of the ‘invisible hand’ of the market to deliver public goods was often discussed in class.
Well, the privatisation of utilities was just the starting point in a long trend to try to roll back direct government involvement in service provision. This led to the development of a large private finance initiative (PFI) and project-based market to deliver substantial upgrades to public services and infrastructure.
These contracts tend to offer predictable long-term revenues – an attractive feature in a stockmarket where predictability is suddenly in short supply.
WS Atkins (ATK) is a consulting engineering firm and a leading provider of infrastructure services. It is involved in the planning and impact analysis of projects, the design of structures and the management of contracts and processes.
Two-thirds of revenues come from government spending or spending by regulated businesses. As users of the UK’s sclerotic infrastructure are well aware, more upgrading is essential. This is a better business than the more contracting-focused firms as its work involves a higher level of intellectual property.
Now that the Metronet consortium responsible for upgrading part of the London Underground network, of which Atkins was a member, has gone into administration, management can focus on the excellent core business. This has good prospects domestically (the main source of revenue) and overseas, as developing-country infrastructure-spending continues rising – Atkins has a growing business in China and the Middle East.
I also like the HSBC Infrastructure Company (HICL) vehicle. It invests in long-term infrastructure projects, with 20-60 year revenue profiles. The portfolio is split between public-sector accommodation (such as the Colchester Garrison facility), education, utility, transport and healthcare projects – including several London hospitals. Its largest investment is the Dutch high-speed rail link.
Most projects are in the operating phase, where there is lower associated risk. It’s encouraging that several have moved into this phase since the vehicle listed in 2006. Stable, predictable revenues from the underlying projects make this attractive – as does the fact that most contracts contain some element of inflation protection.
In line with the sector norm, the projects involve significant levels of borrowing, but the group has either hedged or raised fixed-rate debt for most of its exposure. The fund trades at a discount of 7% or so to its net asset value and yields around 5.3%.
Like infrastructure, oil is essential to our lives. Despite modest progress, this looks unlikely to change soon. From a longer-term perspective we are arguably not that far from reaching global peak-oil production. We like BP (BP) currently. It’s had a tough time operationally over the last couple of years, culminating in a change of chief executive. But political risk, particularly relating to TNK in Russia, and reserve-replacement fears seem to be reflected in the p/e ratio of 11 and 3.5% yield.
BP itself should benefit from the restructuring new CEO Tony Hayward plans to undertake. Estimates suggest the group trades on an implied $13 of enterprise value per barrel of oil equivalent of proven reserves, compared to a European super-major average of just under $18 and a figure of $20 for US peers. This margin of safety is quite re-assuring in choppy financial waters.
The investments Sandy Cross likes
Stock, 12mth high, 12mth low, Now
WS Atkins, 1,269p, 807p, 1,114p
HSBC Infrastructure Co, 120.5p, 106p, 113.5p
BP, 640p, 504p, 583p