Essential infrastructure — Keeping the stove on

Inside the Enhanced Yield Fund

The Enhanced Yield Fund recently built a position in Australian Gas Networks (AGN), a high-quality Australian infrastructure business with stable, defensive cash flows.

Not only that, the Fund bought at what we believe is an attractive 6.5% yield to the August 2025 maturity.

Investment overview

AGN’s portfolio of gas pipelines stretches 26,000 km along the Australian east coast and South Australia. Its network connects to 1.3 million customers – mostly residential homes but also a good mix of industrial and commercial businesses. AGN is paid a percentage of the fee every time someone uses gas within their catchment.

Here’s what we like most about AGN:

  • Monopoly gas pipelines spread across Victoria, South Australia, Queensland and NSW. Any gas users within AGN’s catchment zones must use its pipelines.
  • Defensive business; people require gas regardless of economic conditions.
  • Regulated revenue; the price AGN receives is set in advance every five years and is designed to earn AGN a competitive profit.
  • Revenue is adjusted for inflation and the cost of debt, an incredibly valuable feature in the current environment of elevated inflation and debt costs.
  • Conservative balance sheet; AGN aligns its debt maturities with the regulator, minimising volatility.
  • Owned by CK Infrastructure Holdings, a large and experienced mega-company with a broad portfolio of utilities and funding sources to call on.
  • The bond itself is senior secured, meaning it ranks ahead of the company’s other liabilities and has direct call over the valuable pipeline assets. It’s also inflation linked, automatically adjusting in value to protect against inflation.

We believe a 6.5% yield, based on current inflation expectations, is an excellent risk-adjusted return for the senior debt of a leading Australian business that matures in a year.

More broadly, now is a good time to look at sectors viewed as interest-rate sensitive like infrastructure and utilities. Interest rates have peaked but markets are taking time to adjust prices, which can lead to potential opportunities.

Portfolio of best ideas

The Enhanced Yield Fund targets capital preservation, low volatility and regular income by searching globally for the best businesses in a sector and buying at anomaly prices; companies like this tend to thrive under different market conditions and have the tools available to adapt as needed. AGN brings a strong mix of asset quality, defensive cash flow, liquidity and yield and is a welcome addition to the Fund.

AGN pipeline

Source: Google

About the author

David Murray is a Senior Credit Analyst at PM Capital, a leading asset manager of global and Australian equities and fixed income. More PM Capital Insights are available here.

This insight is issued by PM Capital Limited ABN 69 083 644 731 AFSL 230222 as responsible entity for the PM Capital Enhanced Yield Fund (ARSN 099 581 558)) It contains general information only to provide an insight into how we make our investment decisions. This information does not constitute advice or a recommendation, and is subject to change without notice. It does not take into account the objectives, financial situation or needs of any investor. All investors should seek their own financial advice, and must not act on the basis of any matter contained in this communication in making an investment decision bust must make their own assessment of the Fund and conduct their own investigation and analysis prior to making a decision to invest. Investors should consider the Fund’s Product Disclosure Statement and the Target Market Determination which are available from the PM Capital website. See www.pmcapital .com.au for further information.

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