On Monday President Joe Biden will sign into law his $US1 trillion federal infrastructure bill that will see years of spending and investments that will help underpin US economic growth and corporate activity for years to come.
The huge spending planned under the legislation will seen companies large and small race to grab their bit. Moody’s ratings agency reckons the bill will support years of activity across a wide range of sectors in the US economy and industries.
Moody’s issued a detailed list of companies likely to benefit – no Australian companies were mentioned and you can only wonder if the Boral board and its major shareholder, Seven Group Holdings was too quick to unwind Boral’s US investments (even though they were not performing.)
James Hardie’s biggest market is the US and there is a good chance that its cement board business could see tangential spillover growth over time as housing expands in reaction to improved roads.
Don’t ignore Andrew Forrest and his Fortescue Metals green arm, Fortescue Future Industries because the bill contains billions of dollars for hydrogen.
Our four big banks now have modest operations in the US but Macquarie Group though is the biggest financial player in the US economy and markets through its huge infrastructure and fund management operations.
Transurban and some industry funds separately own toll roads in some US states and will get some benefit as roads are upgraded and offered for sale – which seems the most logical route.
IFM Investors, owned by a collection of industry funds already owns US infrastructure assets and is on record as looking for more opportunities.
Contractors like Worley, Monadelpheous, Downer could be tempted to extend their business activities via takeovers of smaller players in some sectors to get their share of the huge spend.
Reliance Worldwide Corporation, the plumbing supplies and water flow controls company operates across the lower midwest and sunbelt states and will get a boost from improvements in housing access and even supplying products to major construction contractors.
But seeing there will be billions available for upgrading America’s broadband and cybersecurity, there will be room for smaller Australian companies to take a risk and step up and look to the US.
While Moody’s names a long list of American companies in building and construction, materials and associated sectors, it also points out that foreign players are likely to benefit as well and names the likes of Holcim Cement and Heildelberg Cement.
US employment is going to be supported, wages as well, retailing (bricks and mortar and online) will be boosted and in many cases the huge US economy will need to import skilled workers and professionals.
The huge spend is going to change investment patterns, further isolate China because its companies will be excluded on security grounds.
The legislation includes about $US550 billion in new funding for transportation, utilities and broadband. It also invests $US110 billion into roads, bridges and other major projects, $US66 billion toward passenger and freight rail and $US39 billion into public transit.
The bill will invest $US65 billion in expanding broadband access. It will put $US55 billion into water systems, including lead pipe replacements – a major issue after the lead poisoning scandal in the Michigan city of Flint that has just cost the state government over $A1 billion in damages.
The bill will add to the $US1.9 trillion America Rescue bill passed earlier this year and the $US1.75 trillion social safety net and climate package that the administration hopes to get passed by year’s end.
Moody’s reckons that depending on the final shape of the latter act (and assuming it is approved by the Senate where the republicans bitterly oppose it) the final amount ready to be spent will be around $US2.2 trillion.
Moody’s reckons that enormous spend will last for years and will make the US the destination of companies large and small from around the world – except China, Russia, Iran and North Korea.
In a report issued late this week, Moody’s predicted that in addition to ageing roads, bridges and other infrastructure across the US badly in need of repair and years of under built conditions, “we believe factors that will support continued robust construction activity include population growth, more miles driven, as well as low interest rates.”
“For 2022 and 2023, we project US construction spending to grow about 5%. Persistent labour shortages could affect our growth assumptions.
“For 2023, we project the infrastructure bill to significantly boost US construction spending in education, transportation, power, and highway and street work, offsetting slower activity in private residential construction,” Moody’s said in the report with this quick summary of what might happen to various sectors:
Building materials will benefit substantially. Half of aggregates demand in the US typically goes to public infrastructure (highway, roads, and rail roads), with the rest equally split between residential and non-residential construction. Demand for cement is mostly driven by residential and non-commercial facilities (such as building, bridges, ports, airports, data centres, wind mills).
Aggregates, cement and concrete ready-mix producers will see material increases in volume demand and prices. In 2023, we expect the infrastructure bill will boost volume by an incremental 3% for building materials. We also project pricing for aggregates will rise an incremental 3%, and 4% (at least) for cement and ready-mix concrete producers that are operating at full capacity.
US cement producers are already operating at full capacity, limiting any ability to increase supply and offering the cement manufacturers sustainable pricing power.
In recent years, industry consolidation and environmental regulations limited expansion or new entrants, forcing reliance on imports — which account for 15% of total consumption in the US. Importing cement is not ideal, however, because transport costs can quickly outstrip profit if customers are more than 100 miles from a port.
Companies in the utility – water, gas and electricity will benefit the likes of Berkshire Hathaway, which is one of the largest electricity utilities in the country and the one that has converted most to renewable power sources like wind and solar.
“One of the most supportive provisions is a $5 billion Department of Energy grant program to provide funds to improve grid reliability in the face of extreme weather, wildfires and other natural disasters, an important benefit for the sector given the higher frequency and severity of storms, droughts, wildfires and similar events,” Moody’s notes.
Even old-fashioned car companies like GM, Ford and Toyota get something, as will the new EV groups like Lucid, Tesla and Rivian.
“The legislation includes $7.5 billion in funding for charging stations. This investment is credit positive for the utilities and power sector to the extent that it accelerates the adoption of electric vehicles, increases electricity demand and offsets long-term declines in demand caused by energy efficiency and demand-side management programs.
“Additionally, funding to support the development of a variety of new energy-related technologies could ease the transition of the utility and power sector to a carbon-neutral – and, eventually, a carbon-free – future. These technologies include hydrogen, battery storage and carbon capture, which are in relatively early stages of development,” Moody’s explained.
The hydrogen component will see Fortescue Metals and chair Andrew Forrest heading for the US to grab his share.
And for companies (and Moody’s investor clients), the firm is very positive, forecast that:
EBITDA and free cash flow growth are likely throughout the industry. We expect EBITDA and free cash flow growth at 7% – 9% in 2022 and 11% – 13% in 2023. The increase in EBITDA and free cash flow is driven by higher volume and pricing.
We expect the infrastructure bill to provide long-term, sustainable price increases for building materials, which have no substitutes and enjoy high barriers to entry.
Debt capacity to increase. The multiyear infrastructure spending plan provides long-term stable demand and free cash flow predictability, a distinct change for the sector that has long been highly cyclical with limited demand visibility beyond 12 months.
This will enable building material companies to take on more debt without significantly increasing their financial risk.
How companies in the sector leverage this increased debt capacity will be driven by their financial policies and strategic plans. We believe the larger debt capacity will be primarily used for opportunistic mergers and acquisitions, rather than increased cash distributions to shareholders.
M&A activity likely to continue. We expect continued M&A activity among aggregates and concrete ready-mix providers, less in the cement industry which is already fully consolidated. The Top 5 cement producers already control 75% of domestic production, with the Top 8 representing more than 90% of the market.
Meanwhile, the aggregates industry remains fairly fragmented and we expect the larger aggregate companies to pursue additional tuck-in acquisitions, while maintaining a conservative approach to balance sheet management and liquidity.
Among concrete ready-mix suppliers, we also expect further consolidation to increase the density of their footprints, which will improve operating efficiency.
