2 ASX shares that could benefit from rising inflation

These two ASX shares have inflation-linked income.

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Key points

  • Inflation is expected to increase, which could hurt some ASX shares. But, others may benefit
  • Rural Funds has some rental contracts linked to CPI inflation
  • Nearly all of APA’s contracted revenue is linked to CPI

The high level of inflation is getting global attention. It’s affecting ASX shares in various ways. But it might not be all bad for every business.

Some businesses have contracts with their clients or tenants where the revenue is linked to inflation. Therefore, a higher inflation rate could mean that revenue rises faster.

According to the Australian Financial Review, Deutsche Bank’s chief Australian economist, Phil O’Donaghoe, has predicted that Australian CPI inflation in the first quarter will be up 1.7% quarter on quarter and up 4.6% year on year.

Here are two businesses that could see income growth because of inflation:

Rural Funds Group (ASX: RFF)

Over the last six months, the Rural Funds share price has risen by close to 9%.

Rural Funds is an agricultural real estate investment trust (REIT) that owns a diversified portfolio across five sectors: cattle, almonds, cropping (sugar and cotton), vineyards, and macadamias.

How could the ASX share benefit from rising inflation?

Rural Funds says that growth in lease revenue is supported by annual indexation and market rent reviews. It noted that most lease revenue is sourced from listed and corporate food-producing businesses. Rural Funds said with its FY22 half-year result that, broadly, agricultural operators are currently experiencing “good seasons and commodity prices”.

In terms of inflation-linked contracts, 44% of lease income is based on CPI.

APA Group (ASX: APA)

Over the last six months, the APA share price has risen by around 34%.

APA is a large energy infrastructure business. Its market capitalisation is more than $13 billion, according to the ASX. It owns a large gas pipeline – it supplies around half of the country’s natural gas usage. APA also has investments in wind farms, solar farms, gas storage, gas processing, and gas power stations.

How could it benefit from rising inflation?

In the ASX share’s FY22 half-year result, the business said that it’s “favourably exposed to rising inflation with almost 100% of contracted revenues linked to inflation indices”.

APA claims that “gas will play a critical role in Australia’s energy system as an essential companion to renewables and a critical industrial energy source”.

In Australia, gas reportedly accounts for 27% of primary energy consumption and 21% of electricity generation. APA also said gas is typically around half the emissions intensity of coal.

The ASX share is looking to grow its electricity footprint with a strategic investment to acquire 100% of the Basslink senior secured debt at a discount to the face value. Basslink is the energy cable link between Tasmania and the mainland.

APA intends to work constructively with the receivers and managers, and Hydro Tasmania and the State of Tasmania, to “put Basslink on a stable footing and ultimately convert it into a regulated asset”.

Motley Fool contributor Tristan Harrison owns RURALFUNDS STAPLED. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns and has recommended APA Group and RURALFUNDS STAPLED. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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