User-pays infrastructure assets to rebound

Oksana Patron

4 August 2023

Economically sensitive user-pays infrastructure assets across airports, rail and toll road sectors offer investors select opportunities, according to ClearBridge Investments.

The manager’s Infrastructure Value strategy, which maintains diversified exposure to regulated and contracted utilities and user-pays assets, benefited from its positions across the Asia Pacific region which saw Japanese rail operators, East Japan Railway and Central Japan Railway, as its lead performers.

East Japan Railway which saw return of 0.34% is Japan’s largest passenger railway operator which transports 17 million passengers per day and operates the Shinkansen high-speed rail lines north of Tokyo, as well as commuter trains within the Tokyo metropolitan network.

At the same time, Chubu-based Central Japan Railway, which is also a passenger railway company but operates the high-speed passenger trains between Tokyo and Kyoto and Osaka with a network of commuter lines centred in Nagoya, returned of 0.32% on the quarterly basis.

The share prices of JR East and JR Central rallied with Japan reopening their borders post COVID-19.

On top of that, US rail operator CSX (+0.45%) also performed strongly, helped by its engagement  in the transportation of rail freight in the Southeast, East and Midwest via interchange with other rail carriers, to and from the rest of the U.S. and Canada.

ClearBridge said that CSX delivered positive returns following a quarterly result in which the company showed strong improvements across key quality indicators and improvements in its operating ratio.

The strategy, which manages over $2.9 billion in funds under management and seeks long-term inflation- linked capital growth over a complete economic cycle, will continue its defensive positioning.

“Across regulated utilities, fundamentals are still very strong with strong asset base growth driving very attractive free cash flow and cash flow that is being deployed into capex or being paid out to investors,” ClearBridge Portfolio Manager Charles Hamieh said.

“We are also looking for more select opportunities to increase exposure to high-quality user-pays assets in sectors such as airports, passenger and freight rail, and toll roads.

“The outlook for infrastructure remains positive. Infrastructure’s focus on cash flows and underlying earnings make it a very attractive sector as economic conditions deteriorate. With inflation elevated and its path uncertain, the sector continues to act as a strong inflation hedge, where the pass-through of inflation is enshrined in regulation or concession agreements.

“And longer term, infrastructure’s exposure to decarbonization, onshoring of industry and the explosion of data demand bodes well for the long-term asset base growth and the nearer-term cash flow generation and dividend story.”