Varun Anand, portfolio manager at Starlight Capital
Focus: Infrastructure stocks


MARKET OUTLOOK

The equity market volatility we have experienced in 2020 is poised to continue and several binary outcomes could shift markets in either direction. Whether it is the timing of a COVID-19 vaccine, the outcome of the U.S. election, Brexit negotiations or U.S.-China trade tensions, the number of uncertainties facing the market is plentiful while equities are trading at historically high multiples. In this uncertain environment, we believe infrastructure assets are poised to outperform as these companies provide essential daily services to a majority of the population in a supply-constrained manner and exhibit superior revenue visibility and dividend growth when compared to other sectors in the market.

Not only does infrastructure encompass the traditional sectors of energy, industrials and utilities, but it also includes technology-driven sectors such as data centres, cellular towers and payment processing. As a result, investors can benefit from the more defensive characteristics of sectors like electric utilities and waste management, while also having exposure to sectors benefitting from technology tailwinds. Cloud computing, the build out of 5G networks and the continued growth of cashless payments are just a few of the long term structural growth drivers for the “infratech” sector.

The combination of low interest rates, low inflation and low growth, coupled with a growing demand for tax-efficient income, makes Infrastructure one of the most compelling investment opportunities today. The magnitude and growth that lies ahead for this sector is vastly under appreciated by the market. Investment is not only needed to replace and maintain aging infrastructure in the developed world, but also in the developing markets, where there is still a tremendous amount of investment needed to build out infrastructure that simply does not exist today. However, for many retail investors infrastructure is still a new sector and under-allocated in their portfolios.

TOP PICKS

Crown Castle (CCI NYSE)

Crown Castle owns, operates and leases cellular towers and other infrastructure for wireless communications in the U.S. and Australia. It operates more than 40,000 cellular towers, 80,000 miles of high-speed fibre and 70,000 small cells. It trades at a discount to peers SBA Communications and American Tower due to the lower growth and profitability of its fibre and small cell businesses. However, we believe these businesses are positioned to benefit from the build-out of 5G, particularly small cells, given the need for network densification to ensure a robust 5G network. We believe the market is not valuing the growth potential of Crown Castle’s small cell business, while the tower business will also benefit from increased wireless carrier spend and the roll-out of 5G. The company currently yields 3 per cent and trades at 25 times 2021 AFFO.

Switch (SWCH NYSE)

Switch is a pure-play data center company in the U.S. and offers collocation, connectivity, cloud computing and other related solutions to customers all over North America. Switch is trading at a significant discount to the data centre group despite having one of the best multi-year AFFO growth rates and the lowest leverage. Switch is also a technology leader in the space, providing some of the most robust and reliable data center solutions on the market. One of the companies current initiatives, Switch EDGE, is a product that will cater to enterprises looking to capitalize on EDGE computing, and could be a significant growth opportunity not currently reflected in the valuation. SWCH increased its dividend this year by 70 per cent and currently yields 1 per cent, while trading at 17 times 2021 EV/EBITDA.

Infrastrutture Wireless Italiane (INW MIL)

Infrastrutture Wireless Italiane is Italy's largest cellular tower operator, providing widespread coverage throughout the country and hosting transmission equipment for all of the main national carriers. It recently completed a transformational merger with Vodafone's tower portfolio and will integrate more than 11,000 towers in Italy. We believe this merger will result in significant growth and synergy opportunities for the company which are not currently reflected in the valuation. The company also has an upcoming investor day in November where they will present a new growth plan, including an update on their small cell strategy and dividend. Infrastrutture Wireless will also benefit from the eventual roll-out of 5G in Italy. It currently yields 1.7 per cent and trades at 19 times 2021 EV/EBITDA.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
CCI N N Y
SWCH N N Y
INW N N Y

 

PAST PICKS: OCT. 24, 2019

Northland Power (NPI TSX)

  • Then: $26.13
  • Now: $43.07
  • Return: 65%
  • Total Return: 69%

Waste Connections (WCN NYSE)

  • Then: $92.40
  • Now: $102.00
  • Return: 10%
  • Total Return: 11%

Gibson Energy (GEI TSX)

  • Then: $22.78
  • Now: $21.14
  • Return: -7%
  • Total Return: -1%

Total Return Average: 26%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
NPI N Y Y
WCN N N Y
WCN N N Y

 

Website: https://starlightcapital.com/en/
Blog: https://starlightcapital.com/en/insights/market-and-fund-commentaries