Developed & Emerging Market Toll Road Stocks (Mid-2024)
Publicly listed toll road stocks come with stable & predictable cash flows, high barriers to entry, strong inflation linked pricing power & demand-based or dynamic pricing abilities.
Our April 7th post had noted this recent Livewire Markets podcast (out of Australia) that discussed infrastructure stocks and specifically toll road stocks starting around the 20 minute mark:
🎙️ Warryn Robertson’s guide to picking infrastructure stocks on the ASX and abroad (Livewire Markets) 39:15 Minutes (March 2024)
In this episode of the Rules of Investing, Warryn Robertson [Lazard’s Global Listed Infrastructure and Global Equity Franchise] reviews the recent performance of that asset class through an inflationary environment, explains why US utilities look vulnerable and shares what he believes are the best opportunities in infrastructure.
Robertson also reveals what he regards as the top infrastructure stock on the ASX and an infrastructure company with an absolutely stunning earnings outlook.
This shorter talk also covered toll roads:
🎥 Lazard's formula for finding the world's best infrastructure assets (Livewire Markets) 11:48 Minutes (June 2024)
In the following Fund in Focus, Warryn Robertson shares a little more about the Lazard process, the major trends in infrastructure right now, and some of the core holdings in the portfolio. He also explains why Lazard is now offering the Fund via an ETF [Lazard Global Listed Infrastructure Fund Active ETF (CBOE: GIFL)].
Time codes
0:00 - Intro
0:24 - Global listed infrastructure and the investible universe
1:19 - Lazard's track record in infrastructure
2:03 - The new Lazard Infrastructure ETF
2:40 - What makes the Lazard process unique
3:28 - What are the major trends in infrastructure?
6:01 - A core holding in the portfolio that highlights the opportunity
8:02 - Infrastructure vs equities: what are the differences?
9:24 - How might investors think about an allocation?
10:33 - The Fund's return objective
11:15 - How to find out more
Toll roads are interesting investments for the following reasons:
Stable and predictable cash flows - Under normal circumstances as once they are completed, they are pure cash flow minus any debt servicing and maintenance requirements.
High barriers to entry & strong pricing power - As you can’t easily build an alternative route OR the alternative is via traffic clogged arterial roads.
Long-life assets - Especially if heavy trucks are restricted or confined to specially constructed lanes that can handle the wear-and-tear they cause.
Inflation-linked + demand-based or dynamic pricing
I know there has been talk about restaurants implementing so-called demand-based pricing or dynamic pricing schemes for the lunch or dinner hours and holidays, but I wish them luck trying to do that. For toll roads though, the operator has more control…
For example: Let’s say its Sunday afternoon when there is no work week rush hour, but there is a [fill in the blank…] event happening that’s creating heavy traffic on the highway you need to use to get to the airport. The toll road operator now has the capability to use technology to adjust prices according to real time demand. And IF you really need to get to the airport, you will pay whatever price they feel like charging you…
Of course, there are risks with investing in toll roads. For starters, many toll roads are built as build–operate–transfer (BOT) or build–own–operate–transfer (BOOT) projects. Under this arrangement, a private entity finances, designs, constructs, owns, and operates the piece of infrastructure under a concession contract for a certain number of years.
According to Robertson, Australia tends to allow the operator to manage a toll road for up to 30 years whereas in North America, the period tends to be longer e.g. 50+ years. During the time, the operator must recoup all of their costs (10 years is the timeframe I typically see searching the Internet for USA toll roads) and earn a profit. IF the operator gorged on debt to construct the toll road (or needed to build many bridges, tunnels, flyovers, etc. and not enough people use it, they are going to run into serious trouble servicing the debt.
Likewise, Robertson noted how the pandemic had impacted certain types of infrastructure - namely airports, toll roads, and railroads or public transit systems that depend on passenger or freight volumes (versus powerplants, water and sanitation systems which experienced relatively steady usage). But now many toll operators are more than making up for any lost revenue (to the point where tax hungry governments are starting to notice…).
On the other hand, I know its been reported that toll road traffic (and no doubt revenue) is still down in the Washington DC area as many federal workers (who got accustomed to working from home) refuse to return to the office five days a week.
And there are further risks for toll road operators in the West with all of the talk (mainly in Europe at Davos conferences…) surrounding 15-minute cities and restrictions on travel [for climate change/disease X/fill-in-the-blank reasons]. Then there is the fact that cars are getting increasingly unaffordable in the West thanks to government regulations or the pressure on car makers to shift to making EVs (whereas more and more people in emerging markets can afford a basic car that does not come with all the fancy bells and whistles that cars in the West now come with or are mandated to have…).
As for political risks and as Robertson explained, they are not keen on investing in any type of infrastructure in emerging markets or any country where there is not a strong rule of law. HOWEVER, he also mentioned how Canada has been trying to claw more revenue out of toll road operators (although its not clear if the bill will or has passed parliament…).
I must add that as Western governments become increasingly desperate hard pressed for more tax revenues to fund themselves, we cannot be certain any more about the rule of law in Western countries when it comes to toll road BOTs and concession agreements being fully honored (plus governments can just hit operators with some sort of windfall tax which sounds like what Canada might be trying to do…).
As with raising the minimum wage for F&B workers (California…) which can cause havoc with the business models and financial numbers for restaurant franchises, changing the rules or concession agreements for BOTs, adding taxes, or restricting price increases will cause problems for toll road operators.
Likewise, there seems to be a growing trend of installing toll lanes on existing highways e.g. the car pooling lanes on the way to San Francisco from where I grew up in the Central Valley I think now have tolls (as that highway is often jammed through the mountains at all hours of the day). I am not sure if those lanes in particular are being operated by the State or were turned over to a private operator; but any sight of Teslas and BMWs zipping by the peasants at 50 mph might start making the peasants who are stuck in bumper to bumper traffic a little unhappy (and more supportive of special taxes on or contract renegotiations with toll road operators…).
With that said, investors have a range of potential toll road stocks to choose from with China and India having the most while some big European or Australian players also manage toll roads on other continents or in North America.
Note that I have added a few more airport stock related plays to last week’s post (Publicly Listed Airport Stocks + Ground Support Equipment Stocks (Mid-2024)) that I had missed as managing airports might only be a small portion of the stocks’ overall infrastructure businesses.
For this post, there are, for example, a number of Indian construction and engineering stocks involved in the building of highways as well as BOT type schemes that end up managing and operating the toll roads they built (and are thus included in this post).
I may have inadvertently excluded some construction and engineering stocks in other parts of the world that might also be operating some toll roads they built as part of their overall business - it does make sense for them to do so for steadier cash flows when they are between big infrastructure projects. After all, if construction and engineering firms know how to construct roads, bridges, tunnels, etc. for the government, then they know how to maintain and operate them themselves…
Other toll road stocks might just be toll road investors e.g. they purchased a toll road from a government or a private entity that built it.
Finally, I am only aware of one stock (a Hong Kong based company that has underperformed…) purely focused on transportation hardware e.g. fare collection systems/hardware for trains & toll roads, traffic control systems (like the flashing signs and billboards you see), etc. I am sure there are big IT firms who have also developed special software or systems for toll road management and billing…
As for the rest of this post, it includes:
A quick description of the stock with links to the IR page and stock quote(s) on Yahoo! Finance.
A link to any Wikipedia page (for what it might be worth…)
A price/book (most recent quarter) ratio plus forward or trailing P/E and dividend yields linked back to the Yahoo! Finance statistics page.
The latest long term technical chart linked back to Yahoo! Finance.
And as always, this post is provided for informational purposes only (and to make your life easier by providing you with relevant information, links, and charts). It does not constitute investment advice and/or a recommendation…
Wikipedia: Full global list of toll roads…
Asia
East Asia
🇨🇳 China
Anhui Expressway
The principal business of Anhui Expressway (SHA: 600012 / HKG: 0995 / FRA: HU7 / OTCMKTS: AUHEF) includes the investment, construction, operation and management of toll roads within Anhui province. The Company acquires operating expressway assets through various means such as investment and construction, acquisition or co-operative operation. The Company provides toll service for vehicles, collects vehicles toll free according to the charging standard and maintains, repairs and carries out safety maintenance for the operating expressways. Toll roads are large-scale transportation infrastructures with long payback cycle, the characteristics is capital intensive, the investment return period is long and the income is relatively stable.
The Company owns all or part of the toll road equity in Hening Expressway (G40 Hushan Expressway Hening Section), New Tianchang Section of National Trunk 205, Gaojie Expressway (G50 Huyu Expressway Gaojie Section), Xuanguang Expressway (G50 Huyu Expressway Xuanguang Section), Guangci Expressway (G50 Huyu Expressway Guangci Section), Ninghuai Expressway Tianchang Section, Lianhuo Highway Anhui Section (G30 Lianhuo Expressway Anhui Section) and Ningxuanhang Expressway, etc., all of which are located in Anhui Province. As of 31 December 2020, the Company has 557 kilometers of operating highway with total assets of about RMB 16,240,743 thousand. Moreover, as expressways showed the features of network operations, the Group also provided entrusted management services (including the management of toll service, maintenance and repair, information and technology, safety of road assets, etc.) for some road sections to Anhui Transportation Holding Group and its subsidiaries.
In addition, the Company is also actively exploring and experimenting with advertising businesses along the expressway, financial business and fund investment businesses to further expand profit ability and achieve sustainable development of the Company.
Price/Book (Most Recent Quarter): 1.81
Trailing P/E: 14.34 (No forward P/E) / Forward Annual Dividend Yield: 4.19% (Yahoo! Finance)
China Merchants Expressway Network & Technology Holdings
China Merchants Expressway Network & Technology Holdings (SHE: 001965), is a second-tier enterprise of China Merchants Group. In August 2016, CMET was approved by the State Administration for Industry and Commerce. And on December 25, 2017, CMET merged with Huabei Expressway Co., Ltd., successfully listed on the Shenzhen Stock Exchange.
CMET was established by restructuring the former China Merchants Huajian Expressway Investment Co., Ltd., which predecessor was Huajian Transportation and Economic Development Center (“Huajian Center”), established on December 18, 1993. It is the only state-owned enterprise at the domestic central level that manages national toll road assets. In 1999, Huajian Center was merged into CMG, becoming a wholly owned subsidiary of it. In 2009, CMG regrouped and consolidated its expressway business, with China Merchants Asia Pacific Limited (“China Merchants Asia Pacific”, listed in Singapore) merged into Huajian Center. On June 8, 2011, approved by the State Administration for Industry and Commerce, Huajian Center was renamed as China Merchants Huajian Expressway Investment Co., Ltd. and became an operation management-oriented enterprise, being of CMG’s expressway sector. In 2016, CMG made an strategic decision to reorganize and integrate Group’s expressway business sector. Firstly, the privatization of China Merchants Asia-Pacific was achieved within the year. Secondly, strategic investors were introduced. Thirdly, the joint-stock reformation was completed. Then China Merchants Expressway Network & Technology Holdings Co., Ltd. (“CMET”) was established. China Merchants Chongqing Communications Technology Research & Design Institute Co., Ltd. (“CMCT”), which has a history of more than 50 years, was also merged into CMET by increasing its capitals. On December 25, 2017, CMET merged Huabei Expressway and was successfully listed on Shenzhen Stock Exchange.
Price/Book (Most Recent Quarter): 1.12
Forward P/E: 11.92 (No forward P/E) / Forward Annual Dividend Yield: 3.55%(Yahoo! Finance)
