A wall of money is going into building out the green infrastructure required to facilitate the global energy transition. This starts with electrifying power generation all the way through to transmitting and storing this energy before it is eventually consumed.

At the same time, indebted governments are increasingly looking to private companies to help solve the global water challenge.

Water is an essential natural resource for which demand is rising and water utilities around the world will need to spend gargantuan sums on products and services in order to upgrade their infrastructure in the years ahead.

Rather than invest in utilities, which are highly regulated and whose shares are interest-rate sensitive, a smarter way to gain exposure to this theme could be through a ‘picks and shovels’ approach. This is based on the idea that rather than the prospectors during the 1848 California Gold Rush, the people selling them picks and shovels made the real money.

TAPPING INTO AN ESSENTIAL RESOURCE

Waves of investment in water infrastructure will be needed if the world is to ensure there is clean water and sanitation for all, but with governments increasingly unable to maintain supply due to tight budgets and ageing infrastructure, private companies involved in everything from water treatment to leakage prevention will play an ever-more significant role.

Here in the UK, water utilities have drawn the ire of the public due to the woeful service delivered in tackling leaks and the pollution from spills that have damaged the environment, so they are going to have to spend big on infrastructure upgrades.

This backdrop could drive demand for fast-growing water technology company Xylem (XYL:NYSE), whose recent acquisition of Evoqua has helped position it to profit from the water infrastructure investment super-cycle.

A picks and shovels name highlighted by Jupiter’s Wallace is Stantec (STN:CN), a global sustainable engineering and environmental services leader diversified across environmental consulting end markets with a fifth of its business in the water solutions segment.

Stantec consults to global water utility providers, ‘including those in the UK that are now set to invest heavily in pollution monitoring and avoidance technology, given the well-publicised recent sewage scandals’, explains Wallace. Stantec is also benefiting from technology and equipment specifically designed to mitigate the effects of climate change ‘such as flood defence mechanisms, including new environmental infrastructure build outs in energy and transportation’.

FROM COPPER TO CABLES

As BofA Securities points out, as the energy transition unfolds, grids are not up to task, especially in developing markets. Consequently, network operators will need to build transmission and distribution lines which are aluminium, steel and copper intensive.

Also pivotal to the energy transition are interconnectors, high-voltage cables that connect the power grids of different countries and allow surplus electricity to be traded.

Making and laying cables might seem a mundane business line and global cabling companies are often overlooked by investors as a result, yet they play a crucial decarbonisation role, being central to the upgrades to antiquated infrastructure that are required. One example is Milan-headquartered Prysmian (PRY:BIT), a global leader in power and data cable manufacturing and installation and the world’s leading producer of cables for wind farms.

Jon Wallace, manager of the Jupiter Green Investment Trust (JGC), says profitable Prysmian is a key beneficiary from the global energy system’s shift to electrification. He points out power cable original equipment manufacturers (OEMs) will ‘enjoy multiple growth drivers’ from investments across renewable power installation, as well as transmission, which requires significant investment in resilient and interconnected power systems, and also the electrification of the power grid.

As the world’s largest power cable OEM, Prysmian is ‘well-placed to benefit from the increasing infrastructure investment for both energy transition and resilience,’ argues Wallace.

Other examples of picks and shovels plays on transition are Paris-headquartered Nexans (NEX:EPA), the world’s second largest cables play after Prysmian and the third biggest listed cable maker, Danish outfit NKT (NKT:CPH), an industrial holding company whose interests also span wires, optical components, lasers and crystal fibres. Belden (BDC:NYSE) is an American maker of networking, connectivity, and cable products, while Quanta Services (PWR:NYSE) provides infrastructure services for the electric power, industrial and communications industries.

WIND OF CHANGE

Wind turbine providers also play a pivotal role in power generation. In the past, wind turbines were often built around gearboxes, but direct drive technologies, with much higher rare earth metals but low copper content, are becoming more prevalent. By eliminating the gearbox, direct-drive turbines can be smaller and lighter and therefore attractive for offshore applications. They can also operate at lower speeds and require less maintenance.

Leading patent filers in wind turbine gearboxes include Siemens and American conglomerate General Electric (GE:NYSE), as well as Danish wind turbines maker Vestas Wind Systems (VWS:CPH), a holding in Jupiter Green and rival investment trust Impax Environmental Markets (IEM).

Vestas produces turbines for both offshore and onshore use and in 2022 was the second largest supplier by GW capacity behind China’s Goldwind Science & Technology (2208:HKG), whose turbines are mainly used domestically. As well as turbine manufacturing, Vestas makes roughly 20% of its revenues from higher margin aftermarket services and growth has been driven by its ability to capitalise on two secular growth trends: decarbonisation and soaring global demand for electricity.

Shares in Vestas recently reacted positively to news that one of its main competitors, Siemens Energy, was seeking funding from the German government to underwrite its business.

A pair of picks and shovels plays in the Unicorn UK Smaller Companies Fund (3178506) which offer value, trading on forgiving single digit price to earnings ratios with attractive dividend yields, are Severfield (SFR) and Morgan Advanced Materials (MGAM).

Unicorn UK Smaller Companies’ co-manager Alex Game says Severfield, the UK’s market leader in structural steel fabrication, serves end markets including nuclear, battery plants, low carbon transport, renewables and low carbon buildings, whereas the Pete Raby-run Morgan makes carbon brushes used in wind turbines, ceramic rollers used in the manufacture of thin film solar panels, as well as insulation products used in solar towers and steam turbines.

An Impax Environmental Markets holding that could fit the theme is DiscoverIE (DSCV), a supplier of highly customised electronics components to industrial niches which specifically targets renewables as a high growth end market. The £609.9 million cap supplies electromagnetic components for wind systems as well as DC switches for solar power systems, not to mention cable connection, fibre optics and electromagnetic shielding products.

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