Investor take-outs from the latest budget

No direct changes for investors… but there are some big clues.

Investors have little to mull over from the latest federal budget in terms of changes that will have a direct immediate impact with price-sensitive consequences.

Yet there are a number of big budget clues that will have obvious flow-on effects for savvy investors.

Let’s start with the additional $11.6 billion the Government has announced that it is providing to establish an Infrastructure Growth Package to boost total infrastructure investment by Commonwealth, state and local governments, as well as the private sector, to over $125 billion by 2019-20.

There is now around $50 billion worth of infrastructure development programs from the Government on the table, including billions of dollars of funding to projects across Australia covering road, rail, ports, airports and other key state and territory projects.

Infrastructure funding investments by the Government, detailed in the budget, include:

  • $15 billion for roads and rail in NSW,

  • $7.6 billion for Victorian roads and rail;

  • $5 billion for roads and the Perth Airport in Western Australia;

  • Close to $4 billion for roads and rail in South Australia, Tasmania, the NT and ACT.

The latest initiatives are potentially good news for Australian investors, who to date have had limited direct infrastructure investment opportunities. But a lot will depend on how these infrastructure projects are packaged, and which companies gets to work on them.

“The initiative will leverage a significant increase in private sector investment and create opportunities for investors, including superannuation funds, to invest in quality infrastructure,” the Government said in its budget overview.

The budget infrastructure package also consists of a $5 billion Asset Recycling Initiative to unlock capital from state and territory assets, an additional $3.7 billion for the Infrastructure Investment Program – which includes funding for road and other transport infrastructure upgrades right across Australia – and $2.9 billion for the Western Sydney Infrastructure Plan.

The Asset Recycling Fund will be set up on July 1, 2014 to facilitate the Government’s investment in new infrastructure. It will include unspent funds from the Building Australia Fund and Education Investment Fund, and proceeds of the sale of Medibank Private and other possible privatisations.

For investors, there are a few existing roads into the Government’s infrastructure development program, and it’s quite likely that new investment opportunities will arise over time. Those roads include listed companies already involved in major infrastructure development projects, which will be the main beneficiaries of the Government’s program as its development projects are put out to tender.

The Government said it is prioritising road infrastructure, as it provides strong economic benefits for our major cities and regional areas. But there are also big projects in rail freight, ports, and airports.

Exploration Development Incentive

The Government also is delivering its election commitment to introduce a $100 million Exploration Development Incentive to encourage investment in small exploration companies undertaking greenfields mineral exploration in Australia.

Australian shareholders of these companies will receive a refundable tax offset for the company’s greenfields exploration.

“The resources sector has underpinned growth in the Australian economy for more than a decade and new discoveries are vital to the sector, which generated around $171 billion in export revenues in 2012-13,” the Government said.

A clue for investors is that the incentive will target junior exploration companies, commencing on July 1. Expect some pick-up in this sector.

Company tax cuts

Although not a direct benefit to investors, company tax cuts ultimately will flow through to company bottom-line results.

The Government said it remains committed to cutting the company tax rate by 1.5 percentage points from July 1, 2015. For large companies, the reduction will offset the cost of the Government’s Paid Parental Leave scheme. For up to 800,000 small and medium-sized companies, including many listed companies, it will provide a net boost to profitability.

That could mean improved earnings per share returns, which should come through to shareholders in the form of higher dividends. Indeed, as Alan Kohler points out today, companies will be under pressure to deliver higher dividends.

But, as with everything in life, there are no guarantees.