Varun Anand's Top Picks
Varun Anand, vice president and senior portfolio manager, Starlight Capital
FOCUS: Infrastructure stocks
Financial conditions globally are tightening as the U.S. Federal Reserve, the Bank of Canada and the European Central Bank are in the process of tapering bond purchases. As the tapering process unfolded in 2014, short and intermediate borrowing rates rose, increasing borrowing costs for consumers and businesses.
The leverage in the capital structure of many infrastructure businesses makes debt service a large component of their cost structure. With long bond yields consistently below 3 per cent and forecast to remain so, infrastructure assets have extended maturities and locked in low cost structures for years to come.
As global economies re-open, the occupancy and utilization of infrastructure businesses are both set to rise, driving margin expansion and free cash flow generation. The essential nature of the services provided by real asset businesses (power, communications, logistics, transportation) allows for the pass through of wage and input inflation for infrastructure businesses that are exposed to these variables.
Infrastructure assets also stand to benefit from the numerous structural drivers of performance that existed prior to the pandemic. Transport infrastructure continues to benefit from the rise of e-commerce, while immigration and household formation supports utility businesses and waste collection. Streaming and social media continue to drive the demand for cell towers and data centres while a global focus on reducing carbon emissions continues to fuel the need for renewable energy development. These macro trends support strong infrastructure returns in 2022.
Global equities delivered a 27.4 per cent total return in 2013, led by U.S. equities at 32.4 per cent. However, in 2014, those returns fell to 5.1 per cent and 11.0 per cent respectively, as the Federal Reserve tapered bond purchases. In contrast, global infrastructure significantly outperformed, generating a +13.5 per cent in 2014. Given a similar macro environment, we believe global infrastructure will deliver similar relative returns in 2022 as central banks taper bond purchases over the next year.
Boralex (BLX TSX)
Boralex is an independent power producer whose core business is the development and operation of renewable energy assets in Canada and France, with its largest exposure to onshore wind, followed by hydroelectric energy.
The company also recently expanded into the U.S. where it sees tremendous growth opportunities in solar and energy storage. Boralex has an attractive portfolio of assets with long term power purchase agreements (PPAs) and relatively low risk forms of generation (wind, hydrology, solar), while the development pipeline in France and growth opportunities in solar in New York State are not reflected in the current share price.
The company's recent signing of a 20-year power purchase agreement with METRO France, an independent food service provider, highlights the robust corporate demand for renewables globally. The recent share price correction has provided an attractive entry point for long-term shareholders, with BLX shares trading at less than 12x 2023 EV/EBITDA.
Tidewater Renewables (LCFS TSX)
Tidewater Renewables (LCFS) was spun-out of midstream company Tidewater Midstream, and was created to focus on the production of low-carbon fuels and the development of energy transition infrastructure.
LCFS’s flagship project, the renewable diesel facility at its Prince George Refinery, will be the first of its kind at this scale in Canada, and has already secured $100M in carbon credits from the B.C. government.
Earlier this month, LCFS announced it has reached a multi-year agreement with an investment grade counterparty to sell approximately 45 per cent of the British Columbia LCFS credits related to its renewable diesel and renewable hydrogen project. This represents a significant de-risking of the company’s flagship growth project, as LCFS not only signed a multi-year agreement, but at a very attractive price of $425 per credit, well above the $350 price management had forecasted earlier. LCFS trades at less than 4x 2023 EV/EBITDA, well below peers and discounting a much larger project/execution risk than we think is warranted.
The stock price also does not reflect additional projects in the pipeline or the potential upside from the federally-mandated Canadian Clean Fuel Standard, which we anticipate could be worth more than $100/tonne by 2028.
Visa (V NYSE)
Visa operates the world's largest global consumer payment system and boasts more than 3.4 billion credit and other payment cards in circulation. The company licenses the Visa name to member institutions, which issue and market their own Visa products and participate in the VisaNet payment system that provides authorization, processing and settlement services.
Visa has, and will continue to, play a key role in the digitization of the economy and the movement to a cashless society. We view Visa as a provider of digital infrastructure, facilitating the purchase of goods and services through its network without taking on consumer or product risk, and generating tremendous free cash flow through the collection of fees.
Visa has recently sold off on a number of factors, including the emergence of BNPL, Amazon UK's decision to drop Visa acceptance, as well as fears around Omicron dampening travel and cross-border volumes.
However, we do not view any of these factors as structural headwinds for the company, while Visa will benefit from an improving economic backdrop and strong consumer purchasing activity. Visa is now trading at less than 23x FY23 PE, well below its historical average, despite generating strong double digit EPS growth through 2025.
PAST PICKS: October 27, 2020
Crown Castle (CCI NYSE)
- Then: $160.61
- Now: $182.62
- Return: 14%
- Total Return: 17%
Switch (SWCH NYSE)
- Then: $15.12
- Now: $27.12
- Return: 79%
- Total Return: 81%
Infrastrutture Wireless Italiane (INW MIL)
- Then: €9.32
- Now: €10.25
- Return: 10%
- Total Return: 13%
Total Return Average: 37%