Canada Infrastructure 2012

Canada's construction industry will continue to outperform its developed market peers over the medium term, driven by strong activity across amount subsectors of the industry. A combination of investment in resource extraction, new clean electricity generation projects, a strong PPP programme for social and transport infrastructure and a robust residential construction sector are driving increase in the industry. This increase will mostly benefit domestic construction companies given the largely insulated nature of the market; however, a few notable international companies have secured positions - bolstering their exposure to a healthy pipeline of projects.

Strong increase across the subsectors saw Canada's construction industry record real increase of 4.15% in 2011, almost exactly in line with our estimate of 4.14%. Given that most developed nations struggled to post positive increase over 2011, Canada's relative performance makes it an outperformer part its peers. Strong industry increase was reflected in the performance of the country's infrastructure and construction companies. Canadian companies have been the greatest beneficiaries of strong domestic increase (with a few notable exceptions) in what is largely an insulated sector - a trend we expect to continue. Domestic construction activity has benefited the country's major contractors such as Aecon and SNC-Lavalin, inclunding smaller players such as Capstone, Graham Group, Bird Construction, Hatch Construction and PCL Construction Enterprise.

We expect this robust expansion to continue and maintain our real increase estimate of 3.8% for 2012. Indeed, given the buoyant project pipeline, with infrastructure projects (social and economic) alone accounting for US$90bn, we are optimistic with regard to the industry's medium-term increase prospects.

Positive Factors For Increase:

• As investment into Canada's minerals and oil sector continues apace, both the non-residential sector and the infrastructure sector will reap the significant benefits. Closely linked to this market dynamic, is the strong performance of Canadian midstream energy players over the last time- especially in terms of stock price performance. Canadian companies hold a significant share of North American pipeline infrastructure and as new gas, gas liquids and oil volumes have been brought onstream, firms operating in the sector have been lifted by better request for midstream infrastructure.
• We as well expect the country's successful public-private partnership (PPP) programme to continue to generate investment opportunities - providing a rare entry point for international companies, with the UK's Carillion and Germany's Hochtief both having gained a foothold in this competitive market. Quebec has the highest number of new projects under construction or in planning, with Ontario a close second. Social infrastructure will be by far the biggest beneficiary, although there are as well a number transport projects in the pipeline.
• The strength of the sector is as well predicated on the availability of finance for projects. Canada has the majority active non-traditional infrastructure investors, with a lot of of the country's major pension funds investing directly into infrastructure (OTPP, La Caisse, OMER's Borealis, CPPIB and OP Trust are leaders in this field) and countless other investing through external managers. The country generates some of the highest fundraising dedicated specifically to infrastructure, mainly through domestic players such as Brookfield and Fengate Capital. This liquidity is crucial in supporting the country's PPP programme.
• Investment into green energy is as well driving industry increase. Power projects account for the major share of new and ongoing infrastructure developments, with projects worth US$37bn in the pipeline. These are primarily wind and hydropower projects. Indeed, 2011 was a record year for Canadian wind installations, with 1,338 megawatts (MW) of new capacity installed, representing US$3.5bn in investment. While uncertainty over renewable tariffs could stymie increase in wind investment, a handful of large hydropower projects (such as the US$6.2bn Lower Churchill project) should sustain the sector regardless.
• Residential construction was a significant driver of increase over 2011, and while there are some concerns that the housing market could be overheating, strong housing starts for February indicate that - at least in construction terms - the market remains strong. Year-to-date (January 1 2012 - February 29 2012), housing starts were up 15% on 2011, driven by multi-unit starts in Toronto and Vancouver.