Infrastructure ASX shares could be a compelling place to find businesses with potentially reliable cashflows and consistent distributions.
Some investments have exposure to long-term tailwinds like energy transition or population growth.
The below two ideas could be ones to consider as leading ASX infrastructure shares:
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Magellan Infrastructure Fund (Currency Hedged) (ASX: MICH)
This is a fund that aims to deliver the stable returns offered by the infrastructure asset class, while protecting returns from currency movements.
It has a global portfolio of 20 to 40 infrastructure stocks. Some of the names in the portfolio include Transurban Group (ASX: TCL), Atmos Energy, Excel Energy, Crown Castle, Eversource Energy, Aena, American Tower, Enbridge, Vinci and Sempra Energy.
Looking at the portfolio by the sector exposure, there isn't a large allocation to any particular segment. At the end of July 2021, these were the following weightings: airports (8%), communications (10%), roll roads (14%), rail (8%), energy infrastructure (7%), gas utilities (7%), transmission and distribution (17%), integrated power (18%) and water utilities (7%). The rest of the portfolio is a 4% cash holding.
The infrastructure ASX share defines infrastructure as monopoly-like assets that face reliable demand and enjoy predictable cashflows.
This investment pays out a distribution semi-annually. Over the last three years, Magellan Infrastructure Fund's total returns have outperformed the global infrastructure benchmark by an average of 2.4% per annum, after fees.
It comes with an annual management fee of 1.05% per year.
APA Group (ASX: APA)
APA is a large energy infrastructure ASX share. Its key asset is a large, national gas pipeline that spans more than 15,000km. It supplies half of Australia's natural gas usage.
But it has other assets as well, including gas storage facilities, gas processing plants, gas energy generation and renewable energy (wind, solar and batteries).
The business is always on the lookout for opportunities to invest into more assets which aim to increase its overall cashflow generation. It's the annual cashflow generation that funds the payment of the distribution to shareholders.
It has a 'growth pipeline' of $1.3 billion over the next three years. The business is expecting to pay a distribution of 53 cents per security in FY22, which currently translates to a distribution yield of 7.3% at the current share price.
It's currently in a takeover battle to try to buy Ausnet Services Ltd (ASX: AST). AusNet is one of the largest electricity network operators in Australia, with $11.2 billion of a regulated and contracted asset base, as well as $1.9 billion of annual revenue. It services over 1.5 million customers and has 60,850km of transmission and distribution lines across Victoria, as well as 12,400km of gas networks.
APA is attracted to a few different things about Ausnet. APA likes the predictable earnings and cashflows that it offers, with 94% of FY21 earnings before interest, tax, depreciation and amortisation (EBITDA) coming from regulated businesses. The infrastructure ASX share also points to an attractive organic growth pipeline, with $2.2 billion of total Victorian regulated capital investment to 2027.
If APA is successful with the bid, it would change APA's EBITDA generation. APA generated 89% of EBITDA from gas in FY21. The new split would be 58% from gas, 20% from electricity distribution, 13% from electricity transmission and 9% from power generation, contracted electricity and others.
In summary, APA likes the potential AusNet investment for its potential to unlock long-term growth opportunities in the Australian energy transition.
