Warren Buffett once suggested an ideal investment in inflationary conditions - buy a toll booth built with ‘old dollars’.
Building an asset that yields results over time with a one-time capex cost means the coupons collected from such an asset would always be a hedge for investors as the purchasing value of the currency erodes.
Nothing could come closer to match his description than Dubai’s Salik, which announced an additional two toll gates that will go operational in November.
There has been some instant analysis that suggests a ‘fair value’ of Dh3.85-Dh4 for the stock, based on incremental revenues to the top-line based on extrapolation of traffic per gate. And the growth in population Dubai can expect.
This is most likely wrong, and misses the big picture. Analysts, like journalists, often get things wrong, with missiles being thrown at them from every side. In today’s age of social media, with very little time for reflection, they are often reduced to ‘town criers’.
What is needed is time to judge the truth in the cold cast of thought. And the reality is that Salik presents the purest form of inflation hedge yet offered in the domestic and regional capital markets. The ability to add toll-gates, along with the introduction of surge pricing and advertising, in a monopolistic setting, allows investors to attain the one thing that eludes them most of the time: certainty of revenues and bottom-line distribution.
A Discounted Cash Flow (DCF) analysis spits out a spectrum of numbers, but whichever way you look at it, the reality is that Salik offers an upside potential of greater than 100 per cent. A number that increases depending on inflationary assumptions that is input into the equation.
A 49-year concession
The utility of Salik is the concession agreement that is in place for 49 years, and therefore with no competition, in the backdrop of an environment where money supply base will continue to march inexorably higher. This implies that inflation (which is a very dynamic concept but essentially debt-based) will remain higher than in the 30 years that preceded it.
Investors (retail and institutional) can now literally have it both ways; reap the benefits of an improved traffic management system - and more broadly the infrastructure enhancement - and enjoy the revenue (and dividend) streams that will only go one way as the city’s population continues to grow.
This means input costs will continue to rise, and as they do, especially for the infrastructure that Dubai continues to roll out at an ambitious and breath-taking pace, there will be continued upward pressure to increase costs like toll-booths necessary for the management of such infrastructure.
The same logic applies for the upcoming IPO Parkin, which explains the ‘buzziness’ surrounding it, ever since it has been incorporated on Jan 3 of this year.
In 2008, the Nobel Prize winning physicist Murray Gell Mann posited that it was only a matter of time before laws of history would be found like the laws of science. This seems hard to perceive, given the amount of fake news that consumes the ecosystem.
Heavy on speculation
Yet, one wonders whether the same can be postulated for the laws of investing. In an era of zero (and even negative) interest rates, it has been little wonder that asset prices had gone significantly off the rails in most cases, with speculative stories dominating valuations rather than underlying fundamentals.
There is no doubt that whatever the laws (shape-shifting as they are about human behavior) turn out to be, they will undoubtedly incorporate the maxims of ‘asset heavy’ investments in an inflationary environment that shield investors from the deleterious effects of reducing purchasing power.
Salik in this sense represents the crown jewel, and investors who jumped on to the IPO grasped this concept intuitively before any of the analyst op-ed pieces came out. The expanding investor base in the company suggests more are catching on to the tune.