We're All Builders Now

The world is guessing as to what parts of Donald Trump’s electioneering agenda he will deliver on. The much touted wall with Mexico has been downgraded to a partial fence. Mrs Clinton looks as if she will be able to enjoy her retirement outside a penitentiary. Even elements of the reviled “Obamacare” are to be retained. Having developed a reputation for unpredictability on the campaign trail, Mr Trump looks as if he will carry it forth into his presidency.

There is one area, though, where we would be happy to make a judicious bet that there will be some delivery versus expectations and that is infrastructure spending.

We believe this for several reasons. Firstly, it was area where two polar opposed candidates agreed upon. Both touted the need to spend on roads and bridges. Furthermore, the idea has common currency outside America and has been already proffered here in the UK: as a means to offset any hiatus in economic activity as a consequence of Brexit. Japan has been running similar programmes at elevated levels to address its own economic malaise for several years now. More recently China has sought to augment growth in this manner.

What is more, we are at a junction in economic policy. The wisdom of pursuing much reduced benefits of using monetary policy to support or create growth is under question. QE has run its course.

Infrastructure is an area where Donald can get bang for the nation’s bucks. It will help with growth, it will help with jobs. It is tangible. Mr Trump will need to evidence some advances, if only to support the elaborate brocade of his hyperbole elsewhere. The text that follows describes how we identified beneficiaries from this thrust in policy direction, in America and elsewhere.

We assessed a universe of 250 developed market companies in what we deemed to be relevant industries that will benefit from an increase in infrastructure spending. We deemed the following to be relevant beneficiaries: construction materials, construction and engineering, specialist engineering support services, equipment.

From this long list, we applied a quantitative screen to filter for companies with robust balance sheets, healthy cash flows, consistent dividend patterns and reasonable valuations, eliminating those with liquidity concerns and oversized pension liabilities.

This generated a shortlist of 40 companies for further consideration.

At this stage, it was necessary to understand which business lines dominate as these types of companies tend to operate multiple business lines. We also looked at end-markets and sought to eliminate those with a bias to residential property and the energy sector. We screened out those with a concentrated client base, and geographic revenue exposures.

To ensure management integrity, we also assessed management behaviour, shareholder return policies and their recent track records on mergers and acquisition.

At the end of the process, we arrived at a basket of 11 stocks, primarily in US and Europe, spanning construction materials, engineering companies and support services. As a group, the 11 have an aggregate Free Cash Flow Yield of 6.5% and a dividend yield of 2.8% which has grown by 5.9% compound over the past five years.

The eleven are as follows:

CRH is a top two global diversified building materials group, the largest in North America and takes leadership position in Europe. The Company manufactures and distributes a range of construction products including cement, aggregates and concrete for the use in, infrastructure, residential and commercial projects.

Martin Marietta Materials is a leading US-based supplier of aggregates and heavy building materials for the construction industry, including roads, highways, infrastructure, commercial, and residential primarily in North America. The Company also operates a Magnesia Specialties business, including heat-resistant refractory products for the steel industry, chemical products for industrial and environmental uses, and dolomitic lime.

Heidelberg Cement is a Germany-based building materials company. With the takeover of the Italian cement producer Italcenenti, it became the #1 in aggregates production, #2 in cement, and #3 in ready-mixed concrete. The company has a global footprint, operating across Europe, North America, Asia, Australia, and Africa.

AECOM is an integrated engineering firm offering professional technical services to both public and private sector clients worldwide. The Company’s services include consulting, planning, architecture, engineering, construction management, project management, asset management, environmental services, and design-build services on infrastructure assets for clients in more than 150 countries.

Kier Group is a leading property, residential, construction and services group operating across a range of sectors including defence, education, housing, industrials, power, transport and utilities. The Company has operations in the United Kingdom, the Caribbean, the Middle East, Hong Kong and Australia.

Skanska is one of the leading construction and project development groups providing sustainable and innovative solutions for simple and complex assignments within construction, property and infrastructure development projects. The Company focuses on selected home markets in Nordic countries, the European region and North America.

Vinci operates globally in concessions and construction, providing specialised services in building, and civil, hydraulic, and electrical engineering. The company services the design, build, financing and management of infrastructure and buildings, communications networks, and public transport infrastructure systems, including motorways, airports, and road and rail.

Quanta Services specialises in providing contracted engineering, procurement and construction services for the electric power, oil and gas industries and government entities across North America. The Company also provides specialty electric power and communication services, and the installation of transportation control and lighting systems, for industrial and commercial customers.

WS Atkins is a leading provider of design, engineering and project management consultancy services. Services provided by the Company include infrastructure and transportation services, engineering and advanced technology consultancy, property and building design services, facilities management and other related services. WS Atkins operates in the UK, North America, Asia Pacific and the Middle East.

Keller Group plc is the world’s leading ground engineering specialist, providing technically advanced and cost-effective solutions and services to the construction industry. The Company provides products for foundation support and ground retention, underground excavation and ground water control, and conservation and environmental protection services in infrastructure, industrial, commercial and environmental projects.

Interserve is a leading support services, maintenance and building group, operating in the UK and internationally. The Company operates in the public and private sectors, providing a range of integrated services in the outsourcing and construction markets, providing advice, design, construction, maintenance services for buildings and infrastructure projects.

Buying 11 companies across multiple jurisdictions may not be convenient for all investors. As an alternative, we have reviewed and approved the suitability of the iShare tracker: iShares STOXX Europe 600 Construction & Materials ETF. This tracker owns 21 companies and its largest 5 holdings are Vinci, CRH, Lafarge, Saint Gobain, Assa Abloy.

By | 2016-11-30T15:01:26+00:00 November 30th, 2016|Asset Class Returns, Cerno Capital Posts, Cerno Capital Posts|

About the Author:

James is a co-founder of Cerno Capital and lead manages a number of the firm’s collective and private portfolios. After qualifying as a chartered accountant in London (Coopers & Lybrand, 1989) he relocated to Asia. Between 1991 and 2004 he worked as an equity analyst, head of research, and latterly as an equity strategist at WI Carr, Paribas, HSBC and UBS, based variously in Hong Kong, Singapore and Jakarta. James graduated from the University of St Andrews, Scotland with an MA in Philosophy & Logic in 1986. James is a Member of the Chartered Institute for Securities & Investment.