SIMON BROWN: I’m chatting now with Brian Arcese, a portfolio manager at Foord Asset Management who is on the line from Singapore. Brian, I appreciate your early morning. We were talking a moment ago around green energy, green metals, chatting to you around green tech. It’s been bubbling under for a while, but really starting to take off with renewed vigour. We’ve got China proposing [to be] carbon-neutral by 2060. We’ve got a President Biden rejoining the Paris agreement, canceling the pipeline, which has been on and off over the years. My sense is very much this is going to be the decade – and the decades following – for green tech and green tech as an investment opportunity.
BRIAN ARCESE: Hi, Simon. Thank you for having me. I think you’re absolutely correct. Certainly, the Europeans have led over the past handful of years, with the Americans lagging significantly behind. But with the new administration in place, Biden has come out moving targets forward, rejoining the Paris Climate Accord. But even the infrastructure bills that he has put forward haven’t been passed yet. A significant portion of them is investing in green tech in the US and really bringing forward that carbon-neutral date. Even California, for example, is talking about doing so by 2035. To your point, I think that these investments have accelerated or are likely only to accelerate from here.
SIMON BROWN: Yes. And we are talking giant numbers. The infrastructure spend Biden’s talking around is in trillions. Europe has got a trillion of public funding. What this of course has done is there are some stocks that are at very lofty values because of this sort of wall of money that’s coming. In this space, we need to be perhaps a little bit clever as to which stocks are the ones to look at.
BRIAN ARCESE: Yes, absolutely. If you look at the pure-play renewable energy companies, like pure-play wind-farm manufacturers, for example, they’re exceedingly expensive – at 45 or 50 times earnings – for putting in the ground projects where the returns are in high single digits, but also for returns that may be unknown because a lot of these companies don’t necessarily have experience in putting in such large-scale projects historically.
Where we think there’s more in this space, interestingly, is in some of the sectors that had previously been ignored by investors. So if you look at US or European utilities themselves, companies that are trading at less than a market multiple, [they] are investing significantly to transition from traditional fossil fuel into green energy. And, along with that, these companies are highly regulated and get compensated on the capital that they put in the ground, be it for generation capacity on the renewable side or to upgrade the grid itself, which certainly needs significant upgrading both in Europe and in the US.
Those companies we see continuing to trade at less than a market multiple, but actually having fairly steady growth in the double-digit range. And that growth, to your point with the additional spending coming, is likely only to accelerate from here – and really needs to if you’re going to hit the targets.
SIMON BROWN: The one stock you mentioned is Quanta Services. I hadn’t heard of it at all. It’s in your Global Equity Fund at Foord. In essence, they are doing maintenance of electrical grid construction. You [may] look at that and think, oh boring. But actually, they’re in the right space, they’re going to benefit. And per the note that you put out last week, they are actually at attractive valuations.
BRIAN ARCESE: Absolutely. That’s one of the names that we really have a lot of conviction in. When we put it in the portfolio 24 months or so ago it was even a bit more undiscovered than it is now, sort of trading at 12 or 13 times earnings. But the core business, 90% of what they do, is just base business of maintaining and upgrading the electric-transmission grid in the US.
Now the accelerating growth going forward is that obviously not only do you need to maintain what’s there currently, but you really need to invest significantly to replace it, because it’s just not designed to handle both the increase in volumes that you would need, sort of 60 to 100% increase in electricity volumes, just through charging EVs (electric vehicles), for example. And then also, having power move two ways on a grid – into a home and then out of a home, if that home is generating solar.
So the business now trades at closer to a market multiple, but I think that analysts continue to underestimate the growth that they’ll be able to generate going forward
SIMON BROWN: That’s Quanta Services that Brian is talking about. Brian Arcese is portfolio manager at Foord Asset Management, I appreciate the early morning.
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