Summary
Toll roads are a global infrastructure staple, but not every owner-operator has the same return prospects. Finding the market’s best international opportunities requires a deeper look at whether the assets are mispriced.
While most brokers and advisers will be familiar with Australian and US toll road operator Transurban, its global competitors may fly under the radar, despite their sometimes-exceptional upside potential.
In our belief, international alternatives – such as Ferrovial and Vinci – offer better value for investors due to a greater degree of mispricing. Ferrovial is currently our top toll road holding, for reasons we’ll explain in this article.
To begin with, it’s worth understanding why toll roads have the potential to offer both short and longer-term value, provided they are carefully selected and managed.
Why we invest in toll roads
Toll roads have several characteristics that Lazard’s global listed infrastructure team finds appealing, including limited competition, traffic predictability and inflation-linked cashflows.
The mature toll roads we invest in benefit from inflation-linked toll price escalations under their concession contracts. For shareholders, this results in relatively predictable, incremental increases in the company’s revenue when inflation is rising. Meanwhile, much of the capital investment in the toll roads is outlaid at the beginning of the concession, which adds another layer of cashflow predictability.
As with other infrastructure assets, toll road traffic levels are fairly inelastic with changes in price. While some drivers have the choice to avoid toll roads, many will travel on them to save petrol and time. During COVID-19, there was a drop in traffic levels, but they have largely recovered since. Globally, toll roads are now back to experiencing strong demand and we anticipate predictable increases in traffic as populations continue to grow.
Ferrovial’s Largest Toll Road
Source: Ferrovial
Where we’ve found value
Ferrovial
Ferrovial is a Spanish company that owns a globally diverse portfolio of toll road and airport concessions. In our view, it owns some of the highest quality concession assets in the world, with most of its toll roads based in North America. Ferrovial’s key specialty is applying its operational expertise to improve the profitability of its assets. Its historically strong cashflows have also enhanced its ability to acquire new assets.
Vinci
Vinci is another globally diversified infrastructure concessions owner that primarily owns toll roads and airports in developed countries. Like Ferrovial, Vinci’s portfolio and operational expertise makes it an attractive asset.
Atlas Arteria
Atlas Arteria owns four toll roads in France and the US, and a tunnel in Germany. Its largest asset is its stake in APRR (Autoroutes Paris-Rhin-Rhone), which is one of Europe’s largest motorway networks. This stake makes Atlas an attractive portfolio of assets, from our perspective.
Transurban
Transurban owns and operates toll roads across Australia’s eastern states and the US, and meets several of Lazard’s criteria, including traffic predictability and inflation protection.
Why global opportunities require a specialist skill set
Local investors can access two listed toll road opportunities on the Australian Securities Exchange (ASX). The picture becomes more complex at a global level, however, given the myriad different countries and concession contracts.
The Lazard global listed infrastructure team focuses on assets in developed markets to reduce political risk, sovereign risk and regulatory risk, among others. Such risks would undermine the predictable return profile we seek, which is why we take a highly disciplined approach.
Once we’ve screened out companies with exposure to these high-level risks, we drill into the details of each individual opportunity. We examine regulatory structures, demographic profiles, and model volume and pricing in the underlying assets in our search for value. Where we can, we exploit the discrepancy between the market’s pricing and fundamental value. Our approach has helped us deliver consistent performance for more than 20 years.
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