Hills Motorway motors

The best way to share in the profits of great defensive stocks like tollways and banks is to buy their shares. At least some of the money comes back to you.

Infrastructure companies are great investments and not just because they're good cashflow businesses. They are also usually virtual monopolies, granted a licence by governments seemingly incapable of running existing effective public transport systems, let alone improving on them.

Rising share price

Giving a motorway contract to a large construction company is so much easier than extending the rail network and there's the prospect of a few handsome political donations along the way.

Since we've begun coverage of Hills Motorway in issue 53 (Accumulate - $3.29) the share price has risen 58.4% and since issue 64 (Long Term Buy - $4.31) it's up 21%. We have yet to change our view that this is a sound long-term buy.

Low operating costs

Operating the M2 Northwest Transport Link in Sydney, Hills enjoys low fixed operating costs and increasing traffic volumes.

Plant and equipment costs were only $817,000 in 2000 financial year and receipts from customers rose by 15% to $61m over the previous corresponding period. The planet is warming up and commuters would rather pay to sit in air-conditioned comfort than stand on a leaky bus.

And who can blame them? With E-tags, motorists will soon be able to travel on all Sydney toll roads and bridges without stopping at the quaintly named toll plazas.

Despite that, Hills Motorway's net loss after abnormals for 2000 was $134m. That horrible loss was largely attributable to the refinancing of the company's debt. This resulted in an abnormal charge of just over $118m. Hills continues to incur accounting losses and while space does not permit us to go into why, the main point to note is that underlying cashflow is growing nicely.

Take the recent month of July. Traffic may have been 7.1% lower than the previous corresponding period but revenue increased by 10%.

Expected profits will remain negative for the next couple of years, but we don't expect this to have a significant impact on the share price performance in the short term.

Increasing stake

Indeed, Commonwealth Bank recently increased its stake in the company, suggesting that it, like us, envisage a slow and steady climb in the share price once the company experiences increasing cashflows.

This is a stable business not greatly impacted by external forces like adverse economic conditions, political events or the weather. With stable, growing revenues, its fundamental risk is just two. The share price, on the other hand, has a risk factor of three and a half stars, not high, but something to consider nonetheless. We're sticking with LONG TERM BUY.