Illustration: John Spooner.I HAVE surveyed the foreign investment ”debate” and it’s a curious one. Everybody is making sense. ANZ boss Mike Smith is saying we can’t turn our backs on overseas capital when we have trillions of dollars of growth to fund. He’s right, but we have always been open to foreign investment.
Opposition Leader Tony Abbott is out there with the Nationals behind him saying we need to more closely monitor agricultural and rural land acquisitions in part by lowering the dollar hurdle for reviews, and he’s right, too.
Agriculture is being swept up in the same boom that has lifted our miners, for the same reason – burgeoning Asian demand. It is a strategic industry on the cusp of a sustained period of high growth, and a point of natural advantage for this economy, like mining.
Australia has enough leverage to argue terms, and enough skin in the global game to want to monitor acquisition trends closely: it’s no accident that Labor is also considering establishing a national register of foreign-owned agricultural land.
Abbott was also right when he said in Beijing last month that it would ”rarely be in Australia’s national interest to allow a foreign government or its agencies to control an Australian business”.
He could have made the point more clearly, but Treasurer Wayne Swan has responded to the same concern by requiring that foreign investment from state-owned enterprises be tested to ensure that it is arm’s length.
The new chairman of the Foreign Investment Review Board, Brian Wilson, said it best this week when he told the Dow Jones news wire that Australian businesses should be run on a commercial basis, ”and not as an extension of the policy, political or economic agenda of a foreign government”.
That’s a fairly simple proposition. No developed country would disagree with it, and it does not mean that state-owned or state-linked Chinese companies cannot invest in this country as part of a broader national plan to secure crucial commodity supplies. A partial template for such investment in fact already exists, in the direct equity stakes that Japanese groups took in Australian resources projects here in the 1970s and ’80s. They shared the development risk, and received their returns not only as investors, but as customers.
Last year’s foreign investment rejection of the partly government-owned Singapore Exchange’s $8 billion attempt to take over the Australian Securities Exchange was only the second time a major acquisition had been sunk by a national interest veto since 2001, when the Howard government blocked Shell’s takeover of Woodside.
There were 42 other deals rejected in 2010-11, all of them in real estate, and FIRB approved more than 10,000 investments worth $176.7 billion, compared with $139.5 billion in 2009-10: not exactly a lockout.
T’S said that in troubled times investors look for companies that are safe as a bank, but in these troubled times banks don’t necessarily fit the bill. But companies that own and operate toll roads that charge on a CPI-plus formula are very close to the defensive sweet-spot, as Transurban demonstrated yesterday.
The group’s official result for the year to June 30 was marred by a $138 million write-down of the Pocahontas Parkway, a US toll road that Transurban acquired in 2006. It leads to empty fields that in 2006 were expected to become suburbs: America’s property crash intervened.
Total toll revenue for the group rose as usual, however, by 5.7 per cent to $765 million. Traffic growth was actually quite subdued, at 1.9 per cent on the CityLink tollway in Melbourne that accounts for 41 per cent of group revenue, for example – but Transurban’s toll pricing formulas allow it to raise prices by at least the rate of inflation.
The group’s lucrative sideline as a tollway constructor delivered another $286 million of revenue, a 30 per cent increase over the year to June 2011, total revenue rose by 11.4 per cent to $1.15 billion, and underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were 9.1 per cent higher at $784 million – but there’s some other numbers that reveal what sort of beast Transurban is.
One is the ratio of EBITDA to revenue: at 45 per cent it’s outstanding. Another is the free cash flow the group throws off, and the relationship it has to Transurban’s investor payouts. At least 95 per cent of the uncommitted cash flow is distributed to investors.
Free cash rose by 11 per cent to $433 million – or 29.8¢ a share – in the year, and Transurban lifted its distribution by 9.3 per cent to 29.5¢.
Traffic volumes are still being affected by tollway renovations and subdued economic conditions but Transurban is predicting a distribution of 31¢ in 21012-13, and you can see how it is going to happen.
Former BHP chief financial officer Chris Lynch took over as chief executive of Transurban in April 2008 and by the time he handed the reins to former Lend Lease chief operating officer Scott Charlton last month, he had pulled Transurban’s gearing down to 45 per cent, cut costs and turned on Transurban’s inflation-protected cash flow machine.
Charlton can and is expanding the group’s toll road franchise. His main job is to keep the cash flow machine revving, however, and it’s very doable.
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