#infrastructurespending

We pray the Gov’t makes more $60bn mistakes!

Can the media and shadow politicians get a grip? Since when should taxpayers complain when the government makes a huge error in our favour? We can pretty much stake our lives on the fact that 99% of government programs end up way more expensive than initially budgeted for. French Submarines anyone? NBN? We should be looking at the JobKeeper revision as a massive positive.

The federal government estimated that the JobKeeper program would initially cost $130 billion. Now it appears they overestimated it by $60 billion. That was driven by the idiosyncrasies of who would be eligible at the employer end – from the self-employed to big business and everything in between.

Given the limited time window, forgive the Treasury and Tax Office for not landing estimates on target. It is ridiculous to expect they could estimate such a fluid piece of legislation.

The unwelcome arrival of COVID19 and the sudden stay-at-home orders that ensued hardly gave a generous window of opportunity to apply Japanese level precision engineering to the process.

Our only criticism lies with the drip feed approach to restarting the hibernating economy. As we mentioned yesterday with respect to the 50 US states, so many appear to be copying each other rather than making bold data driven decisions based on facts not consensus.

The reality is that the Treasury will need to make many more multi billion dollar mistakes in the spirit of JobKeeper to help mitigate the damage caused by the looking trillion dollar deficits.

Perhaps the $60 billion saving can be redeployed to building a bullet train from Sydney to Melbourne. A 20-yr project that is just the type of infrastructure spending which ticks so many boxes – relieving pressure on the state capitol cities, housing, assist a growing population and provide lots of jobs.

Get ready to buy Boral & ABC rather than watch a market swim in concrete shoes

Governments rarely have imagination during crises. Usually, it involves chucking uncosted cash around. How many projects have we seen run way over the promised budget? Submarines anyone? NBN?

Handing out $750 cheques to 6 million struggling Aussies in the hopes they’ll spend it is a bit of a wing and a prayer strategy. Maybe those struggling will just use it to pay down debts of previous consumption rather than ignite a new spending splurge.

At some stage, large-scale infrastructure spending will return to the headlines to stem the economic slowdown. Look at the state of national infra spending forecasts in the chart above.

Bridges to nowhere. Tunnels, highways, schools and hospitals. New projects to get people back to work. It happens pretty much every downturn. So why should we expect anything different?

A read of the latest infrastructure report states quite clearly there are 4 areas to address:

  1. Population growth has become a major point of contention in infrastructure debates. In our largest cities, ageing assets have been put under growing strain, with rising road congestion, crowding on public transport and growing demands on social infrastructure, such as health, education and green space.
  2. Energy affordability has also deteriorated over recent years. A steep rise in network costs has driven energy bills 35% higher over the past decade, and up by 56% per unit of electricity consumed in real terms.
  3. In telecommunications, the nbn rollout continues to face challenges. In the 4.8 million households in which it has activated, services have not met the expectations of many users.
  4. In the water sector, the past four years have seen mixed results. Many metropolitan utilities are increasing the sustainability and quality of their services through innovation, supporting the liveability of our cities. But many regional areas are suffering from growing water security fears as large parts of the country are in drought.  

Cement companies play straight at the heart of three of these four distinct areas. Roads, rail, hospitals, schools, dams and so on. In the energy space, whatever direction we take (solar, wind, coal, gas or nuke), cement, asphalt and aggregates will be required to achieve it.

Bellwether Boral (BLD) is perhaps best positioned to benefit as it makes railway ballast, asphalt, cement, concrete. Boral shares have yet to be kicked as hard as others. Boral hit a GFC low around the $1.64 mark. It stands at $3.00, 33% above that level.

BLDAX

50% of Boral’s Aussie revenue comes from NSW, the state with by far the healthiest balance sheet and the biggest infrastructure projects. 50% of revenue is Australian based with another 38% coming from the US which has huge infrastructure needs. 25% of group revenue comes from roads, highways, subdivisions and bridges. Good leverage.

Adelaide Brighton (ABC) has been bludgeoned in this market meltdown and $1.35 is the level it hit at the pits of the GFC in 2008. If it starts to sink below that level, it will start to look interesting again. If you look at the chart you can see it has slid from almost $7 in 2018 to its current price of $2.24.

Adelaide

A read through ABC’s last set of results points to the difficulties in the market for its cement and aggregates business. It has also embarked on a rationalisation program before all of this coronavirus hysteria.

We hold no positions in ABC or BLD as yet but will look to accumulate should the market continue its sell-off towards these 2008/9 lows.

The national government is out of options but to build out locally. They have already used the bushfires excuse to ditch the budget surplus plans so might as well push a bold infrastructure plan to save us all!  The best plan would be a high-speed rail project which addresses real long term needs of Australians.