Transport Infrastructure: Final Reflections
Planes don't need AI to land. They need airports.
Ships don't need disruption to dock. They need ports.
And dividends don't need hype to compound. They need profits.
These statements sum up my research in the transport infrastructure space. Over the past two months, I've published three deep dives (totalling 30,000+ words) and highlighted the investment cases for the Mexican airport's OMA and ASUR, as well as the Filipino-listed ICTSI, a port operator. My final article is significantly shorter, serving as a concise summary of my thoughts rather than another lengthy, in-depth dive.
Why Transport Infrastructure?
In an era of rapid technological change, it's becoming increasingly difficult to find businesses that are likely to exist, let alone thrive, in 10 or 15 years. But transport infrastructure stands out. Physical goods will still need to be transported, and people will continue to travel for business, leisure, or migration. You can't ship a container or take a vacation flight using AI. These assets are foundational and have no digital substitute.
The 4 Transport Infrastructure pillars
There are currently 322 listed transport infrastructure companies worldwide, but only 14 of these are considered large caps (with a market capitalisation of more than $15 billion). I split the industry into four sub-groups:
Airports: These are my favourite. They benefit from non-aero revenue (such as duty-free, logistics, and VIP services), have pricing power, and traffic growth is correlated with GDP, but are exposed to economic shocks.
Railroads: The listed railroad companies are the highest moat companies among the four and are skewed towards politically stable economies (Australia, Canada, USA). These rarely come cheap today.
Ports: Ports are capital-intensive, and as an industry, they still have considerable potential for further consolidation. These assets can be geopolitically sensitive, so they require additional scrutiny.
Highways and toll gate: Among the four, I dislike toll operators the most, as they're most exposed to political optics, and it is very hard to justify fee increases. They also work directly with the end user and are over-leveraged.
The investment framework
My investment framework for these assets is quite simple and has four elements:
Defensible moats - Most companies have these.
Growth potential - Revenue growth of 8%+, profit growth of 9%+ per year driven by a mix of pricing power, volume growth and acquisitions.
Dividends: 3-4% dividend yields.
Reasonable valuations: Currently priced below 15x P/E versus a fair value of 18-22x.
Finding this combination is rare but rewarding in the long term. In my journey searching for these, I've learned a few lessons along the way and here are five key lessons:
Emerging markets offer more potential. With caveats
I started out preferring developed markets when I began my transport infrastructure journey in 2020, such as the US railroads and airports in Europe, like Malta International Airport and Flughafen Wien (Austria). However, the deeper I looked, the more compelling the growth opportunity in emerging markets, particularly in Latin America and Southeast Asia. It's far better to focus on large populations with some GDP growth and infrastructure needs, such as the Philippines, Indonesia, Mexico and Brazil.
That being said, the primary concern is currency risk. Nigeria's listed airport service companies SAHCO and NAHCO have been the golden geese of the transport infrastructure sector over the past five years, returning 30x in local currency. But in US dollars, 7.5x. While still impressive with a 53% IRR over five years (one of the best globally!), investors would have still lost more than half of their returns due to currency depreciation alone. It's essential to consider and factor these currency challenges into the investments. I generally prefer names with hidden dollar exposure and international clients (both SAHCO and NAHCO do) or companies with clear regulatory tariff paths to price increases upon dollar appreciation versus their local currency.
2. Capital allocation is a key differentiator
The Filipino-listed port operators, ICTSI and Asian Terminals, present an excellent case study on capital allocation. Since the beginning of 2000, ICTSI shareholders have made 238-times (25% IRR) on their investments, while Asian Terminals shareholders have made 94-times (20% IRR) on their investments, including dividends. This means that for every $100 invested in both companies, ICTSI generated $14,400 more over 24 years simply because it reinvested its excess cash into other ports outside the Philippines, while Asian Terminals paid them as dividends. Capital allocation remains a key differentiator for transport infrastructure and one should consider both internal and external capital allocation efforts.
3. Concessions can be a double-edged sword
One downside of transport infrastructure is that it is a public good that requires government approval and concessions and must abide by their rules to maintain these contracts. Generally, I avoid assets with less than 10 years remaining on their contracts unless there is strong visibility on renewal. Political instability is a red flag; concessions can be revoked, modified or challenged, as we learned from ICTSI's experiences in Syria, Brunei and Sudan.
4. Debt can still kill the investment case
Although these companies are broadly high-moat businesses with strong, durable moats, over-leveraging can still lead to several problems. Debt is one of my biggest challenges with the highway and toll gate operators. Transurban Group (Australia), the largest highway-listed company globally, spends 80% of its EBIT servicing interest expenses, leaving very little room to invest in new projects. On average, listed toll roads (4.9x total debt/EBITDA) have more than twice as much debt as airports (2.0x) and ports (2.2x). Balance sheet discipline is still critical.
5. A stock picker’s market
Although I find many of these transport infrastructure companies to be of high quality, the painful truth is that the majority of them will underperform the MSCI ACWI Index over the long term. Transport infrastructure is a stock pickers market - identifying the 2-4 companies with growth potential, strong economics, and undervalued relative to their peers is crucial.
Finally, I'll leave you with ten companies that I have shortlisted within the transport infrastructure industry.
Aena (Spain, airport): The world’s largest airport operator, 17x P/E, 4% dividend yield
Airports of Thailand (Thailand, airports): Thailand’s only airport group. Expensive but with recovery potential. 20x P/E, 3% dividend yield
Asian Terminals (Philippines, ports): Smaller port operator in the Philippines. 9x P/E, 6% dividend yield
ASUR (Mexico, airport): Mexican tourism play. 12x P/E, 4% dividend yield
Athens International Airport (Greece, airport): Recently listed with tourism tailwind, 12x P/E, 6% dividend yield
Canadian National Railway (Canada, railroad): Transcontinental Canadian network. 19.5x P/E, 2% dividend yield
GAP (Mexico, airport): More diversified but at higher multiples to peers. 24x P/E, 4% dividend yield
ICTSI (Philippines, port): Diversified EM port operator. 17x P/E, 3% dividend yield
OMA (Mexico, airport): Recovery and near-shoring growth boost. 18x P/E, 5% dividend yield
Union Pacific (USA, railroad): The West Coast rail gateway. 20x P/E, 2% dividend yield
Athens Airport is significantly overearning. If you split the regulated and unregulated business, value the regulated one as a multiple of the asset base and the unregulated one with an earnings multiple, it looks fairly valued
Terrific work Dede, one of the best writeups I've seen on Substack. Curious to know your thoughts on Fraport (ETR: FRA) and their future? Also wanted to highlight Bangalore International Airport (BIAL). While private, half of it is owned by Fairfax India (which in turn is owned by the very capable Prem Watsa) - rumoured IPO.