BBGI Global Infrastructure S.A. (BBGI) Earnings Call Transcript & Summary

Good morning. Welcome to the 2023 annual results presentation for BBGI. My name is Duncan Ball. I'm joined with Michael Denny. We appreciate your interest this morning, and we'll kick off. So hopefully, you're seeing the slides on your screen if you're participating in the webcast. But BBGI's purpose is to deliver social infrastructure for healthier, safer and more connected societies while creating sustainable value for shareholders. Just a quick recap of our investment approach. So our strategy is based on 4 pillars: low risk, internally managed, globally diversified and a strong approach to ESG. In terms of low risk, we have -- 100% of our portfolio is availability-style investment assets. So these are contractual cash flows coming from public sector counterparties. The result is cash flows that are stable and predictable with high-quality inflation linkage. The second pillar is internally managed. Just as a reminder, we're the only infrastructure company with an in-house management team, and our interests are aligned with those of our shareholders. We're focused on delivering shareholder value first and not focused on growth in AUM. The third pillar of our business is our global diversification. So we're in a range of countries that are all AA- and AAA-rated, which provides a stable and well-developed operating environment. And fourthly, we have a very strong approach to ESG. It's integrated into our business model. And our portfolio is -- delivers strong social impact, and we're an Article 8 firm under SFDR as we deliver social benefits under the EU Sustainable Finance Disclosure Regulation. And additionally, we have a high degree of climate resilience, and that's been tested in our portfolio. So now on to the exciting part, our financial highlights for the year. The net asset value reduced modestly by 1.4% to 147.8p per share. Based on our current share price on the 25th, that represents a 6.7% dividend yield. We're very happy to reaffirm our dividend targets, so 7.93p per share for 2023, 8.4p per share for 2024, representing a sector-leading 6% increase. And our target for 2025 is 8.57p per share. We have a high degree of inflation linkage of 0.5%, and it's high quality and contracted. Our dividend cover is robust at 1.4x. The total annualized NAV return since IPO is 8.6%, and our ongoing charge is the lowest in the sector at 93 basis points. This slide just talks about our 3 business principles, which are value-driven asset management, prudent financial management and selective acquisition strategy. So we have 56 core infrastructure assets, and they all performed well. We're very proud to report that none of them are in lock-up or have prohibitions on distributions and our cash receipts were ahead of expectations. We continue to have high levels of availability at 99.9%, which drives high customer satisfaction levels. With respect to prudent financial management, we repaid our RCF, so we have no drawings outstanding, and 55 of our 56 assets have no refinancing exposure. We have one asset that has a tranche of debt that is coming due in the next couple of years and we have a refinancing obligation, but it's not material. Thirdly, we have a very selective acquisition strategy. We apply a disciplined approach to capital allocation and when we consider potential acquisitions. We certainly looked at a lot of things in the past year, but we did not buy anything. We directed our surplus cash flow towards the repayment of our RCF, and we will consider growth in the future but on a very selective basis. Just want to highlight our internal management. A key characteristic of our internal management is we have an in-house management team. This means there's no external manager. Everyone at BBGI works for the company. We think this is the model that creates full alignment with our shareholders. It also results in a low ongoing charge of 93 basis points. There's no acquisition fees. There's no disposition fees, lowest ongoing charge in the sector. And the incentives for our team are very much aligned with those that are of interest to our shareholders. Just talking very quickly about our disciplined approach to capital allocation. So in recent periods, we benefited from higher inflation and earned more on the cash we hold in our various project companies on deposits. So inflation and higher interest rates have benefited in that regard. So we've shared that with shareholders. We paid out to shareholders increased dividends. It was 6% in 2023. We increased the dividend again in 2024 by 6%, and we will increase it again in 2025. We used the excess cash flow during the year to pay down our RCF, as I mentioned. As we move forward, we'll be very disciplined about how we approach new opportunities. And we will be measured in alternative uses for excess cash flow and consider that appropriately. The next slide, this just -- we thought it would be interesting to show this. This demonstrates our ability to grow organically. So in 2023, we bought 2 assets for over GBP 60 million. One was the John Hart Generating Station in British Columbia, Canada. The other one was the A7 Motorway in Germany. We drew on our RCF to pay for these projects. And by the end of 2023, we've paid this off -- paid off our RCF. So effectively, we bought these 2 assets out of free cash flow, so just demonstrates our ability to grow organically. I want to just touch on our dividend track record. So you see this slide. The top chart shows the yearly increases in dividends over the last 12 years, which has averaged 3.4%. The high-quality inflation linkage has allowed us to increase our dividend targets. So as mentioned, we're increasing at 6% in 2023, 6% in 2024 and increasing it thereafter. We've consistently provided a progressive dividend to our investors, and we've outpaced U.K. CPI since our IPO in 2011. And just recently, earlier this month, we were recognized by the AIC for the strong dividend history. As you may know, there's dividend heroes, which are companies that have increased their dividends for 20 years or more. Given we IPO-ed in 2011, we haven't met that criteria, but we are excited that we're classified as the next generation of dividend heroes. So these are companies that have increased their dividend every year for 10 years but not 20 yet. So we're proud to receive that recognition. If you go to the next slide, this just shows not only we've grown our dividends, but we've also grown the NAV per share. So over the last 12 years, the accumulated NAV per share and dividend has added up to about 223p on an initial investment of 100p. So the total NAV return since IPO has been 170% or 8.6% on an annualized basis. And if you look at the TSR, the TSR is 141% over the same period or 7.6% on an annualized basis. The next slide just showcases our portfolio and talks about the 4 key strengths of our portfolio. So it's 100% availability-style assets. That means that these are core infrastructure assets and we get paid when they're available. It's 100% operational. We had one asset that was in construction. That completed in September of this year. And as a result, we have a 100% operational portfolio. We're geographically diversified. We're in a collection of stable countries, typically AA- and AAA-rated. We're in Continental Europe, so Germany, Netherlands and Norway. We're in the U.K., we're in Canada, we're in the U.S. and Australia. And then it's a well-diversified portfolio in terms of sector splits. So we're in transportation, health care, fire station, police station, correctional facilities, schools, affordable housing, clean energy and municipal buildings. So if you go to the next slide, that just highlights our portfolio composition. We are proud to report this year, we're able to show our top 10 investments. In the past, we've shown our top 5 because we were constrained as to what we could disclose on one, but we're now able to show the top 10. And you'll see that the top 10 constitute 48%. So it's a well-diversified portfolio with no asset having undue concentration. You'll see in the center chart that we have a diversified supply chain with a whole host of counterparties. So we're not concerned about specific counterparty risk. And we have a young portfolio with a long remaining life. The average portfolio life is 19.3 years. Just pause here and remind everyone what we do in the portfolio. So we have 19 roads and bridges. We have a fully electric public transit line. We have 41 essential health care facilities, 4 police stations, 26 fire stations, 4 modern correctional facilities, 33 schools and colleges, 3 affordable residential housing facilities, 2 community centers, a hydro-generating facility, 2 public administration buildings. So these are buildings and assets that are used every day by communities and people. Our hospitals serve over 4 million patients a year, 2,400 beds. Our roads connect travelers and we have 2,800 kilometers of roadway servicing 290 million vehicles a year. Our hydroelectric facility powers 80,000 homes a year. And our fire stations serve 800,000 people. And I think our police stations protect about 1.4 million people. Just to -- we've introduced a new slide this year just telling you a little bit of our company. So our team, we have about 30 people with a wealth of backgrounds from engineering, construction, asset management, finance, accounting, ESG specialists, risk and compliance, valuation, IT, the whole mix. We've got a very diversified team. We're in 8 countries. So we're close to our clients. And these are the people that take out our -- conduct our asset management approach, which is focused on value preservation, hands-on active asset management and delivering enhancements. The outcome of that is we have very high availability rate, so 99.9% availability. And we do a net promoter survey every year, and we have 56 as a Net Promoter Score, which is very high and it puts us in the top quartile. So it means we have important assets that are being delivered to a very high standard, resulting in happy clients, and happy clients make for a much easier life. So we're very happy about that. I think we missed this -- oh, there we go. We thought we'd just showcase some of the active asset management that goes on in our portfolio. So this slide, just talking about how we're using AI in our portfolio. So we began using AI on some of our road projects earlier in the year. And what we've done is we have external cameras that are mounted on the cars of our asset managers. There's a small Galaxy -- Samsung Galaxy tablet inside the car. And every time our asset managers drive up and down the roadway, it takes video of the road surface. Michael was joking and said, "Why are the kilometers for some of our asset managers so high?" It's because they're driving up and down the roads, taking surveys. So this information is captured, it's stored in the cloud. And then AI carries out machine learning on the images and allows us to track in real-time the microcracks on the roads that grow into fissures and they grow into life cycle obligations. So if we have a real-time database, it helps us do predictive maintenance. It allows us to do it in a safer and more efficient manner. Our engineers aren't having to go on the road and stand there and look at cracks there. So they're safer, it's cost-efficient and it's very -- it's well received by our clients because we're being very proactive in identifying issues and addressing them before they become bigger issues. So it's just one of the initiatives that we have going on in the portfolio. And with that, I'll take a breath and hand it over to Michael, and he will walk you through our valuation.

Thanks, Duncan. So just on the valuation, just as a reminder for everybody, we value the portfolio twice per year: in June and December. The Management Board is supported by an in-house valuation team that develops the valuation using a discounted cash flow methodology, the resulting valuation reviewed by both the external valuation expert and the company's external auditors, PwC. The valuation process itself methodology is unchanged since we IPO-ed in 2011. So the next slide gets into some of the detail on the NAV movement over the course of the year, which contributed to a modest 1.2% NAV decrease. So if we start with the portfolio return, which contributed a GBP 93.7 million increase resulting from the unwinding of discount rates and portfolio performance. GBP 18.5 million of the GBP 93.7 million is attributable to value enhancements delivered through our active asset management. These value-accretive activities included life cycle cost management, portfolio company savings, change order revenue, tax and treasury management and optimized cash reserving. Changes in market discount rates resulted in a decrease of GBP 41 million with a weighted average discount rate moving from 6.9% to 7.3%. We continue to apply a market-based approach when setting the discount rates. And while transaction data was more muted in 2023, there were a sufficient number of relevant data points observed, which support the rates we have used. We've obtained at least one relevant data -- transactional data point for each country in which we invest, except for the Norwegian kroner. Each of the data points represents a transaction closed in December '22 or later. Two of the data points are from auction processes, which BBGI ourselves participated in, in North America. And in the case of Norway, where no transactional data was available, a risk premium of 3.7% has been applied over the risk-free rates. Changes in macroeconomic assumptions resulted in an increase of GBP 11.4 million or 1.1% on the NAV. The main drivers here were short-term and long-term deposit rates accounting for GBP 25.7 million and forecast inflation contributing a further GBP 4.2 million. Against this, the company took a final provision of GBP 16.3 million, reflecting the negative impact from the Canadian excessive interest and financing expenses limitation, or EIFEL. And this adds to the GBP 9.8 million position we took in the financial statements in 2022. Foreign exchange has provided a further headwind, resulting in a decrease of GBP 23.3 million with the sterling appreciating against all currencies. However, the downside was partly mitigated by our FX hedging, leading to an overall net negative movement of GBP 9.5 million on the NAV. Let's go to the next slide. So on the next slide, we look at the discount rates and the allocation between the risk-free rate and the risk premium. So our methodology for determining appropriate discount rates is based primarily on market-observed transactions, as I mentioned. For the December '23 valuation, we have used a weighted average discount rate of 7.3%, which is up 40 basis points on the rate used in December '22, 6.9%. Again, in 2023, we have complemented our market-based approach with a capital asset pricing model approach, where government risk-free rates plus a risk premium are used to construct the discount rates. The CAPM approach is primarily a reasonability check to our market-based approach, particularly in periods where there was reduced or limited market data or transaction data. As can be seen in the chart, the weighted average risk-free rate for the year was slightly reduced to 3.6% compared to 3.8% at December '22. And based on the risk-free rate, our weighted average discount rate -- under weighted average discount rate, the resulting risk premium is 3.7%, which Management Board believes is appropriate for a portfolio of low-risk availability-style investments. With the risk premium -- while the risk premium has increased year-on-year, we believe it's appropriate given the observed market data, elevated macroeconomic volatility during the reporting period, and it's also well within the observed historical range. Moving on to our macroeconomic assumptions used in the '23 valuation. So if we just start with inflation, with the exception of the U.K., there's been -- where there's been a slight increase in the long-term rates, all other long-term inflation rates have remained the same compared to December '22. For the 2023 valuation process, we have introduced a short-term 2025 inflation rate assumption, where official forecasts are available, recognizing that in some jurisdictions, inflation is expected to be sticky and continue to be at heightened levels into 2025. Deposit rates. Short-term deposit rates have risen broadly in line with the increase in the underlying benchmark rates and reflect those rates which we have been achieving on our portfolio of deposits at the year-end 2023. We expect the deposit rates to remain at elevated levels in most jurisdictions for 2024. We've also updated our long-term deposit rate assumptions to reflect the current rate environment, bringing them in line with the long-term averages. The effect of the revised deposit rate assumptions resulted in a GBP 25.7 million or 2.4% increase in the NAV. Corporate tax rates have remained unchanged. Next slide, we just focus on the quality of our inflation linkage. So despite inflation now appearing to be under control, it still remains an important topic and one that we're frequently asked about. This particular slide shows how BBGI benefits from high-quality inflation linkage. The bar chart on the left-hand side of the slide shows the uplift in NAV in both percent and pence per share or inflation to be 2 percentage points higher for a 1- or a 3-year period. For example, if inflation is 2 percentage points higher for 3 years, then our forecast assumptions, all else being equal, the NAV would increase by 2.9% or 4.3p per share. We have a high-quality inflation linkage of 0.5% noted for its contracted nature. This high-quality label is justified by our contractual arrangements, whereby the public sector clients are committed to paying availability fees, including an explicit inflation pass-through providing direct inflation protection. Next slide, we just present the key sensitivities related to our macroeconomic assumptions. As you can see, the NAV impacts vary, but the most sensitive of these variables is, again, the discount rate where a 100 basis point increase would result in a NAV decrease of 7.3%. However, as we said in last year's report, it's unlikely that, in our view, that discount -- that changes in discount rates will happen in isolation. Therefore, when we talk about a change in rates, it is important to consider all rates, discount rates, deposit rates, inflation rates, as we believe they're all interlinked. So if we take a scenario as we show in the table above where discount rates move by 1%, then it might be reasonable to assume that the deposit rates and inflation rates move in a -- by a similar amount. So in other words, a 1% increase in each of these rates would result in a 1.5% decrease in NAV. I think it's notable that this is just approximately 1/5 of the impact if you assume a 1% decrease in discount rate alone -- or increase, sorry. And with that, I'll hand back to Duncan.

Okay. Thank you. I'm just going to talk very quickly about our role as a responsible investor in infrastructure. ESG is integrated into our business model. We publish a stand-alone ESG report. I think last year, it was 65 pages. It will be similar or longer again this year. That will come out in June. And it will give you a comprehensive update on some of the ESG activities in our portfolio. Our annual results are available online, and there's also quite a bit of detail there in terms of our reporting on ESG. But just in terms of what we've done this year, we quantified Scope 1, Scope 2 and Scope 3 greenhouse gas emissions for all our portfolio assets. So previously, we've reported at a corporate level, but we're now reporting it for all the financed emissions for all the assets we have in our portfolio. Additionally, we plan to develop net-zero plans for each asset, socialize those plans with the clients, with the expectation that we can work with them to help them meet their net-zero obligations. And hopefully, that will result in some change order revenue and activities which are going to be beneficial for everyone. We also -- as a reminder, we're an Article 8 firm, and we published our Principal Adverse Impact Statement, which is a requirement for SFDR. We looked at 12 environmental and 8 social metrics. That's available on our website. And as a reminder, we've done extensive climate resilience testing on all 56 of our assets. Any new asset is also screened. We look at 8 different perils under 3 different time horizons and 3 different climate-warming scenarios. So when we buy an asset or have an asset in our portfolio, we're very comfortable that it is going to be fit for purpose, not only today but in 5 years or 10 years, as the world changes and the effects of climate change are more obvious. We get often asked about what the outlook is for our sector and what are we doing to address it. Key allocation -- capital allocation is key to our approach. Last year, we directed surplus capital towards repaying our RCF. We now have a clean balance sheet with no borrowings. And so we're well placed to consider new opportunities. We're looking at a lot of opportunities, but we're being very selective in what we pursue. We're focused on 4 key themes, which are decarbonization -- we call it the 4 Ds: so decarbonization, so energy transition; digital; demographics; and deteriorating infrastructure. And we think that balance sheets matter. And in the regions where we do business, governments have all, right and left or center, irrespective of the political party in power, they all have challenged balance sheets. So we believe there's going to be a continued need for the private sector to support infrastructure development. So we think that there's going to continue to be attractive opportunities for us to deploy capital. But we're always reviewing our strategy. You may see us diversify away from purely availability at some point in the future to address portfolio construction. But our DNA has not changed. We're focused on assets that generate stable predictable cash flow that have inflation linkage and have a social purpose. As a reminder, we have a pipeline agreement with AtkinsRéalis, but that's an option, not an obligation to acquire assets. So we think we're well positioned with a clean balance sheet to consider opportunities should they arise. But as always, we'll be disciplined in our capital allocation and we will be responsible. So just to conclude, thank you for your time this morning. Just to recap, it was a good set of results. We're delivering critical social infrastructure, so health care, schools, police and fire stations, affordable housing, and transportation, all with a strong social purpose. It's availability-based. We're paid by strong government counterparties. It's climate-resilient. It's got strong inflation linkage. In an environment where a lot of businesses are facing uncertainty, our portfolio has continued to perform as expected. And we've got -- we're very proud of our fully covered dividend and the fact that we've been able to increase the dividends consistently for our investors. We have a low correlation to other asset classes. And as we look to the future, we'll be disciplined in our approach. We'll take a measured approach toward growth, and we remain confident in our ability to continue to invest in opportunities that are going to serve our shareholders and serve society. So with that, I'll thank everyone and open it up for questions in the room, followed which, we'll take any questions that are available online or on the phones. Iain?

It's Iain Scouller from Stifel. Just on discount rates, I think there was a very slight 10 basis point move up in discount rates between the first half and second half. Was that asset-specific or is it just market-related? And in the past, you used a bit of an additional or a premium discount rate on some of the U.K. health care assets. Are you still applying that?

Yes. I'll take that one, Iain. So good question. Yes, there was a slight increase in our overall discount rate. We went from 7.2% at midyear to 7.3%, so 10 basis points. It wasn't specific to any one asset. It was more a recognition that we're in perhaps more volatile markets and the pickup that seems to be required by investors has increased. So it's a reflection of that. We continue -- we -- your question about acute care hospitals, we have one acute care hospital in the U.K. under the NHS trust. It's performing well, no issues. But as a general sector, that's an area that's been under a bit more stress than other parts of availability-style assets. So we continue to make that adjustment for those assets, but there's been no fundamental change in terms of how we value our assets. It was just a modest increase in the pickup over the risk-free rate. Sorry, I think you had a question. Yes?

I was just going to -- it sounds like you put some thoughts into capital allocation versus your pipeline opportunity. Could you just give us some more color regarding how the opportunity compare and whether you have considered or have talked to the Board about perhaps buyback or other methods of returning capital?

Yes. So when we think about how we're serving our shareholders and how we allocate capital, we look at it simply and we say, "We've increased the dividend," so that's returning capital back to our shareholders. We've paid down our RCF. So that's obviously -- when you have a large RCF drawing and you've got excess capital, that's the obvious situation to address. So now we're in a slightly different scenario than what we've been in the past, where we've grown organically. We've effectively used our RCF to acquire 2 assets and have used excess cash flow to pay for those assets. So -- but going forward, it's always a trade-off. It's balancing what's in the best interest of the company and what's in the best interest of shareholders and making sure the company is resilient but also addressing desires. So everything is put through a lens and scrutinized against alternative uses where we look at it through the lens of portfolio construction, strategic initiatives, use of capital. So it's not just a mathematical exercise. It's how do we position ourselves for the future as well.

Just kind of a follow-on question from Iain's. Sort of on the back of the relatively subdued transactional evidence that you saw in 2023, I think you applied a premium over a risk-free rate of about 3.7%. And I guess, to the untrained eye, given that compares to kind of 6% back in 2020, I just wondered if you could sort of provide some justification in terms of what you've seen differently in terms of transactions, but also what you would say to investors to give them confidence on valuations.

So I think the starting point to address that is we use a capital asset pricing model, but fundamentally, we rely on market transactions. And while we haven't sold assets, there certainly have been asset trades that have occurred this year that are very similar to ours. And we typically get the -- we get the models, do the analysis. We may not bid or may not be successful at bidding, but we have the data to know what those transactions trade at. So we look at those. And we've -- as a result of that, we've seen an increase in headline discount rates from where they were a year ago. And I think that's consistent with others in the sector who report. So it is primarily based on market-observed transactions, but we use a capital asset pricing model. And the capital asset pricing model, then you sort of back-solve those transactions, has resulted in a slight widening. So we -- I think at midyear, we were 340 basis points over the relative risk-free rate, and now we're 370. So it's a 30 basis point movement, and the impact on the overall discount rate is a 10% movement upward. Valuation is a bit of an art rather than a science, so -- but I think we're very confident in our NAV that it's accurate. Is it accurate to 3 decimal places? I don't know, but it's certainly accurate. It's reviewed by our auditors who are a big 4 auditing firm. It's reviewed by our independent valuer who's a big 4 auditing firm. And it's supported by market transactions and a capital asset pricing model. So we're pretty comfortable that it's appropriate for the valuation.

Just another follow-on. You mentioned potential revenue uplifts from kind of ESG integration into portfolio activity. How does appetite for this differ across geographies? And also, is there sort of any indication as to the size of revenue uplift potentially?

Yes. So we actively try to work with our clients to facilitate change orders. So we've had expansions at some of our assets that has generated change order revenue. And this is more theory than actual practice, but we look at the different geographies we're in, and we see that governments have made commitments to the -- to be aligned with the Paris targets. And some have signed up for 2035 net-zero obligations. And we believe there may be an inflection point at some point in the future where governments say, "We're behind in our targets, and we need to -- as eventual owners of these assets, we need to make sure that the buildings are energy-efficient and everything else." So what we've done is we've collected all the greenhouse gas data this year. We're starting to share it with the clients. And the first step is collecting the data, socializing it, and then we're working to develop net-zero plans. The hope is if there's low-hanging fruit that we can achieve savings and there's a payback, we're prepared to invest in the portfolio to do that. But a lot of these are longer-term investments that will go beyond the life of the concession. So we believe that if we're able to show up with a menu as such to the public sector client of initiatives that they might consider, we will see some take-up on that. And I think it varies depending on the jurisdiction. It varies depending on -- I think it's been quite modest in terms of the interest right now. But I think as people get closer to the targets, our house view is that there may be capital coming from the top flowing down to meet these targets. So if we're ready and have ideas how they can make their buildings more energy-efficient or do things like that, it may be a sense of -- a source of change orders. But it's not just related to net zero, where we have a -- I had a call last week where we have an Amazon facility that's come into the neighborhood and is putting more traffic on the roadway. And we've proactively approached the clients saying, "Do you want to expand the road? We might be able to do a blend and extend, where we extend the concession and we invest some money to give you greater capacity." And not all those ideas are necessarily taken up, but clients appreciate it. They recognize you're bringing innovation to them. They all have stressed balance sheets. So it's a welcome opportunity. And you can often do it within the existing procurement structure without having to go out and do a new public procurement. So I think if there are no further questions in the room, we'll open it up to any online.

We have 2 questions submitted via the webcasting page. The first comes from Markuz Jaffe from Peel Hunt. And his question is, are there any regions and/or sectors where you are seeing the most competition or highest pricing for assets? And the second part is, would you consider selling any exposure BBGI has in these areas to reinvest elsewhere, offering higher returns?

Yes. So we look at each market, and it's hard to -- as Michael said, that we saw transactions in all the markets, save for Norway. And it's not that Norway is a bad market. It's just a smaller market and there aren't as many PPP opportunities. So it's reasonable to expect that the volume of activity might be lower there than, say, in the U.K. or Canada or Australia, where there's well-established PPP markets. So there are some modest changes. Valuations are slightly different between some markets. But we value assets in each market independently and based on market-observed trends. And there's no market that stands out as being more aggressively priced or less aggressively priced. And we're very happy with our portfolio, but we're always open to consideration. If someone were to offer us a very attractive price for an asset, we would consider it. And if we sold an asset, we would look to redeploy that capital, and it might be back in the same market, it might be in a different market. But I don't think there's a huge arbitrage between one market to the next or there's not one market that concerns us that we're worried about that we want to reduce exposure there and increase it in another.