HICL Infrastructure PLC (HICL) Earnings Call Transcript & Summary

Hello. And welcome to this webinar for HICL's annual results for the year ended 31st of March 2020. [Operator Instructions]. I'll now hand you over to Ian Russell, HICL's Chairman, for some words of introduction. .

Thank you, Kirsty, and good morning. And welcome to everyone on the call. My name is Ian Russell, and I chair the Board of HICL. At this time, our priority is keeping our infrastructure available to support critical services and ensuring that those who are responsible for maintaining it are safe. But we also recognize the importance of the income, which we provide to investors. And therefore, we're pleased that HICL's performance enabled us to meet our dividend target for the year. COVID-19 obviously affected our results towards the end of our financial year and has influenced our dividend outlook. Nonetheless, at a time when the broader market faces considerable uncertainty, the underlying strength of our portfolio and its defensive attributes stand us in good stead. I will remain on the call to answer any questions which you have for the Board. But now, I'd like to hand over to HICL's Investment Manager, Harry Seekings.

Thank you, Ian. Good morning. And thank you all for dialing in to join this morning's presentation. Although we're announcing these results in unusual circumstances, we wanted to make the most of the opportunity afforded by technology. And it's great to have a large number of HICL's institutional shareholders on the call as well as our usual audience and research analysts. With me from the InfraRed team today, I have Keith Pickard, the Finance Director for HICL; and Edward Hunt, who works closely with me in HICL Fund Management team with a particular focus on the underlying assets and acquisition strategy. For the next 30 minutes or so, we're going to take you through the HICL results for the year ended 31st of March 2020. And at the end, we'll have time for a few questions and expect to be finished shortly after 10:00. So I'll start with some brief observations on Page 4. And firstly, perhaps just a reminder, the portfolio of core infrastructure investments, HICL is designed to deliver to its shareholders stable income, and also access to the key attributes of infrastructure investment, long-dated cash flows and returns that have good correlation to inflation. Secondly, and as many of you would have heard me say before, diversification is an important component of HICL's investment proposition. Later in the presentation, we will hear how built on diversification from 117 investments across 3 segments of the core infrastructure market, the underlying strength of the portfolio has helped to deliver a solid performance for the year to 31st of March 2020 despite the challenging end to the year. And thirdly, InfraRed's approach to active management of the HICL portfolio has never felt more important than it does in the current context. Our asset management team has been particularly focused on ensuring that the infrastructure in which HICL is invested is available for use by our key stakeholders. At HICL's Capital Markets seminar in January, we discussed how good relationships are fundamental, successful, long-term investment in community infrastructure. And in these most-challenging circumstances for our NHS clients, in particular, I'm pleased that our management teams and supply chain have been able to respond rapidly to the infrastructure needs of the hospitals in the HICL portfolio. As Ian mentioned, the Board and InfraRed are also conscious of the importance of HICL's dividend to its institutional investors and individual shareholders. This is at the heart of the company's investment proposition. HICL's objective is to deliver stable income. And more specifically, the company's dividend policy targets an annual dividend that is at least the equivalent of the previous year. And I will talk more about the dividend for the year ahead in just a moment. You can see on the graph at the top left of this page how the dividend has grown over the years. And we expect that by September of this year, the capital of IPO investors would have been fully returned in less than 15 years through the payments of dividends. I'll turn now to the results themselves, and Page 7 provides an overview of the key points. And there are a few that I'd like to highlight. The overall performance for the year was solid, albeit this was the net result of 2 themes, which are pulled in differing directions. For 11 months of the year, HICL has made steady progress. In particular, we saw an alleviation of political risk in the U.K. after the election. The resolution of Ofwat's price review for the water sector and the successful return by the company to capital raising. However, in March, and as communicated on our investor call on the 23rd of March, our demand-based assets were impacted by the lockdowns put in place by various national governments in response to COVID-19. The transport assets that rely on the movement of people locked down, such as those that we have witnessed, are particularly challenging. The consequences of those -- of COVID-19 for these assets have been twofold on both their valuation and the distributions we expect to receive from them in the near term. We'll talk more about these impacts in more detail on a later slide. But here, I just want to emphasize 2 points. Firstly, we expect the impact on distributions to be temporary, and that the assets will benefit from returning demand as lockdowns ease. And secondly, the assets themselves have sufficient financial resilience to withstand the lockdown and forecast period of recovery. Nonetheless, since we're not expecting material distributions from these investments in the current financial year, the Board has decided to revise dividend guidance for the year to 31st of March 2021. HICL now expects to pay a dividend of 8.25p for the coming year, in other words, in line with the financial year that has just completed. And we expect this dividend to be substantially cash covered. We will revisit the guidance for the year to 31st of March 2022, once the timing and the shape of the economic recovery from COVID-19 become clearer. And we will keep you updated within our regular communications. A final point on this slide, which I will return to later, is that while we're focused on active management of the portfolio at this time, we do also expect the current crisis to reduce opportunities, and we're making sure that HICL is positioned to take advantage of these selectively. In preparation for that, we refinanced the company's revolving credit facility in March, extending its maturity to 2023, and GBP 321 million of this is currently available for use. I'll now hand over to Keith to take us through the financial highlights.

Thanks, Harry. In what's been a challenging and unprecedented market context, I'm pleased to report the underlying portfolio performance was solid in the year. On this page, I'd like to highlight, in particular, top middle tile and a return on NAV basis of 1.9%. There was a solid 7.1% return from the underlying portfolio, and that includes September's reduction in value on Affinity Water. However, this was offset by a combination of external factors: the exceptional impact from COVID-19 on demand-based assets and changes to macroeconomic assumptions, reflecting a lot of longer interest rate environment and higher U.K. tax rates as the planned reduction in corporation tax rates to 17% was reversed. Bottom right-hand tile, cash cover 1.14x. This is reduced compared to the prior year due to lower profits from disposals. Adjusting for this, I'm pleased to say that underlying cash generation, that is excluding profits on disposals, increased 6% in the year. For the current financial year, we are expecting reduced cash generation due to COVID-19, with HICL's demand-based asset portfolio not expected to provide yield in 2020. In terms of what does this mean for dividend cash cover in the year to March '21, based on current forecasts, we expect the target dividend of 8.25p will be substantially cash-covered. Bottom left tile. In uncertain times, it's worth noting that HICL has a strong liquidity position. It's got no borrowings, GBP 28 million in cash, and as Harry has said, GBP 321 million available to draw on its debt facility. Moving on to Slide 10 to look at long-term cash flows. Delivery of sustainable income is the heart of HICL's investment proposition. This slide looks at cash generation from the portfolio over the next 40 years, cash flow that underpins HICL's dividend. Vertical bars show income to the group, subject interest, dividends, subject principal. The gray bars represent increases in forecast cash flow compared to this time last year. Hollow bars represent delays and reductions in forecast cash flows, mainly from the demand-based assets as a result of COVID-19. In particular, the larger hollow bars represent delays in refinancings on Northwest Parkway. Also included in the chart is the impact of the 2 disposals in the year. In the first column on the left-hand side, year to March '21, you can see the significant impact we expect from COVID-19 to have on portfolio cash flows with a larger hollow bar. Investment Manager is clearly focused upon trying to improve upon these forecast cash flows. The gray line on the chart shows the net present value of these cash flows, giving a projection of how portfolio value would evolve over time, assuming no acquisitions, disposals or changes in valuation assumptions. So the key takeaway from this slide is HICL has a visible long-term steady income stream, combined with a stable capital base. Moving on to the valuation on Slide 11. Valuation methodology, same as previously. This slide seeks to explain the movement in valuation over the year. So beginning on the left-hand side, last year's valuation of GBP 3 billion. Considering investments and divestments of GBP 40 million and GBP 56 million, there were 2 material investments in the year, Race Bank and Galloper OFTOs, and 2 material disposals, Enniskillen Hospital and Health and Safety Laboratories. To show you how the portfolio is performing, we split out the valuation reductions on Affinity Water and COVID-19 on the right-hand side of the chart. So excluding these, the portfolio return is GBP 234 million or 8.6% of the rebased valuation. This represents outperformance from the portfolio with the return ahead of the discount rate at the beginning of the year of 7.2%. There were various value enhancement activities driving this performance, including delivering project variations, disposals and savings on Lifecycle expenditure. The GBP 40 million reduction in Affinity Water we disclosed in the September interims, it's unchanged since then, and reflects the final determination from Ofwat for AMP7. The GBP 72 million COVID-19 movement represents the valuation reduction on the 4 demand-based assets sensitive to GDP, that's A63, HS 1, M1-A1 Link and Northwest Parkway. On our later slide, Ed will take you through this movement in more detail. The GBP 58 million decrease to changes in economic assumptions includes GBP 25 million of low interest rates and GBP 30 million for the increase in U.K. tax rates from 17% to 19%. GBP 20 million FX gain here is from sterling's devaluation, which has been partly offset by hedging losses. So the net effect of FX for the year was a gain of around GBP 14 million. Moving on to Slide 12 on discount rates. Discount rate is the most important judgment for the valuation. In the September interims, we reduced the discount rate by 0.2% in the Eurozone and Canada. And prior to COVID-19, we had anticipated reducing discount rates at March across various geographies. In particular, in the U.K., we saw PPP pricing increase as the political uncertainty reduced following the general election in December. With COVID-19 as a prudent measure, we decided not to reduce PPP discount rates out of increased discount rates on the demand-based asset sensitive to GDP. This has increased the portfolio's average discount rate by 0.1% since the interims to 7.2% at March. As said, the discount rate can be analyzed by applying a risk premium over long-term government bond yields. This chart shows how the discount rate has evolved since IPO. Government bond yields, the purple bars, the gray bars are the risk premium. And you can see here, the continuing trend of low government bond yields and a high risk premium. Risk premium at 6.5% is the highest level we have seen since IPO in 2006. We've seen this high risk premium as a significant downside risk mitigant as well as an opportunity for attractive risk-adjusted returns. Moving on to Slide 13 for valuation assumptions. On the valuation assumptions, given the significant deterioration in the macroeconomic environment, we believe it's important to show how we've prudently amended our forecast and the valuation to reflect these changes. Firstly, looking at interest rates. Here you can see, we reduced both the short-term and long-term interest rate assumptions across all geographies. In the U.K., we have reduced the short-term from 1% to 0.5% and extended the period by 1 year to this low level to March 2023. While in the long-term, we have reduced the rate we expect to recover to from 2% to 1.5%. These more conservative assumptions differentiate HICL from its listed peers. Now looking at GDP growth towards the bottom of the slide. We forecast negative GDP in 2020 of between minus 3.5% and 5.5%, in the countries where we have our 4 demand-based assets sensitive to GDP. These GDP forecasts reflect current expectations as to how COVID-19 will impact GDP growth in the U.K., France and the U.S. Now moving on to Slide 14, where we look at sensitivities. The sensitivity is NAV per share to changes to the key assumptions as shown on this chart. Sensitivities are broadly similar to those presented previously. We'll make a couple of observations. The key attraction of the asset class and one of the company's key performance indicators is inflation correlation. This is unchanged over the year at 0.8%. Meaning that inflation is 1% higher for all future periods, then the return from the portfolio would increase from 7.2% to 8%. Now looking at GDP. If GDP in the U.K., France and U.S. were to decrease permanently by 0.5%, this would result in NAV per share impact of 4.4p or a reduction in the portfolio's return from 7.2% to 7%. We consider this a very unlikely scenario. It also shows that our underlying resilience of the portfolio to quite a severe downside. That's all I wanted to cover. I'll now hand over to Ed, who will take you through the portfolio in more detail. Thank you.

Thank you, Keith. I'm going to take us through the portfolio, starting on Page 16 [Audio Gap] this time last year. On the right-hand side of the slide, a reminder of the diversification of the portfolio, which Harry noted at the start. The top 10 investments represent 44% of the portfolio and the largest asset just 6%, that's Affinity Water. You can also see the spread of the top 10 across the 3 market segments shown by the different colors. This diversification is an important metric for InfraRed and for the Board. We continue to believe it benchmarks well. On the following slides, I'll step through each of HICL's key market segments, starting with PPPs on Slide 17. PPPs remain very much at the heart of the portfolio and make up 72% of the asset mix. PPPs are long-term contracts between the public and private sectors for the provision of essential assets for the public sector to then deliver essential services. These cover a range of sectors, including law and order, transport, education and, of course, healthcare. We're pleased with how HICL's PPP portfolio companies continue to support their public sector clients through the current climate by ensuring that assets remain available for use by their respective communities. In the case of HICL's healthcare assets, in particular, this has required a truly collaborative and flexible approach to meet a rapidly evolving situation, including significant changes to the layout of facilities, to enable effective hygiene, separation and isolation. The long-term availability style contracts typical of PPPs ensure that project revenues remain directly linked to the [Audio Gap] patterns of use within the facilities. Outside of healthcare, we were pleased with the commitment to invest in the Blankenburg Connection PPP in the first half. This greenfield tunneling project in the Netherlands brings to 3% the proportion of the portfolio in construction. To date, HICL has successfully brought over 20 projects through construction. This is an important driver of our performance for HICL and one that we expect to continue to see going forward. Turning now to demand-based assets on Slide 18. Demand-based assets, where project revenues are dependent on the patronage of end users, represented 20% of the portfolio at year-end and comprises 6 assets, 2 of which are non-GDP linked. These assets performed in excess of expectations for the first 11 months of the year, and despite the impact of COVID-19, finished the year in line with forecast. Clearly, they have been impacted by the unprecedented lockdown conditions across HICL's core geographies [Audio Gap] the A63 Motorway in France and Northwest Parkway toll road in Colorado and the High Speed 1 in the U K. And I'm now going to take some time to discuss these in more detail on Slide 19. Here, we've set out more detail around the base case valuation assumptions for the key demand assets. Our valuation approaches 2 main components, and these are summarized in the larger purple box on the right-hand side of the page. The first of these is detailed asset-level revenue modeling. This reflects the lockdown and the gradual easing of restrictions in the short term and also an adjustment to the trajectory of the longer-term growth profile. The shorter-term decline in recovery of revenue was set out in the smaller quarterly inset chart. And the longer-term revenue growth picture is set out on the larger annualized chart. The second main component of the valuation approach is a discount rate adjustment. This has been applied to each asset to reflect the uncertainty around the shape of the economic recovery. The valuation assumes that full lockdown conditions remain in place until June 30, 2020, after which there will ease over time to reach unrestricted operating conditions by the 1st of January 2021. And as I mentioned, you can see that reflected in revenue terms on the smaller quarterly chart on the slide. These assumptions around lockdowns are the key drivers of expected short-term cash flows from the assets to the HICL portfolio. To reset longer-term growth, we use a median of economic forecast for GDP for 2020 and 2021. GDP impacts traffic. And so these GDP forecasts are key drivers of revenue growth for the assets over the long term. The effect of our GDP assumptions is that traffic across the 3 assets takes on average 2.5 years to exceed pre-COVID levels. Looking at the chart, you can see how reduced traffic creates a gap between the pre- and post-COVID-19 revenue forecasts. This is represented by the difference between the gray and yellow bars in a larger chart on the slide. The approach we have adopted to GDP utilizes the median of economic forecasts captured up to the 27th of April. And we've provided additional sensitivity and scenario analysis around GDP both in the annual report and in the appendix to this presentation. And before I move on, I can give you a brief update on the latest figures for the last week. Due to the easing of lockdowns in France and Colorado in the U.S., the A63 was running at 65% of budgeted revenues and Northwest Parkway at 35%. Our latest management data for High Speed 1, which has a slightly different revenue model to the toll roads, puts it at around 86% of budgeted revenues. It's early days, but in aggregate, this performance is ahead of the assumptions used in the valuation. Through these numbers, we're already seeing that these assets are positioned to immediately benefit from the resumption of movement and of economic activity. These are strategically important assets in their respective regions, and will play a key role in facilitating the economic recovery. Turning now to HICL's regulated asset segment on Slide '20. Regulated assets represent 8% of HICL's portfolio and comprises Affinity Water and 3 offshore transmission assets or OFTOs. In the year, InfraRed closed 2 of these OFTOs to HICL, Race Bank and Galloper assets, which together enabled the transmission of electricity sufficient to power over 850,000 homes. InfraRed is working to reach financial close on the fourth of these with Walney OFTO, and this is on track for this quarter. As Keith mentioned, we're pleased to see the easing of both regulatory and political overhang on the sector at the end of the calendar year with a clear general election outcome and the finalization of the Water sector's regulatory review process, PR19. Affinity accepted Ofwat's final determination for its business plan for AMP7, enabling management to focus on getting on with the challenging operational requirement to the AMP, not least the additional complexities brought around by COVID-19. On this, Affinity Water continues to operate with limited operational disruption. The company has arranged itself to prioritize those areas of operational improvement that it can at the current time. So whilst gaining access to homes to fit water meters remains difficult, they are prioritizing other initiatives, such as addressing leakage in the system, where they can progress even with current social distancing measures. These challenges are not unique to Affinity Water, and this widespread engagement with Ofwat from the sector with respect to the performance commitments across the AMP. Pages 21 and 22 set out the usual breakdown of portfolio statistics. Generally, some minor movements brought about in the main by the valuation changes [Audio Gap] Page 22 and is the ownership stake percentages. Whilst HICL already enjoys a controlling interest in over 60% of the portfolio, there remains significant opportunities to acquire additional equity stakes across HICL's portfolio companies. These typically present as bilateral off-market transactions on assets that HICL is already very familiar with. This area of the market remains an attractive proprietary source of deal flow for the company, and particularly so in the current market. Leaving the portfolio there, I want to move us on to an update on some of the key developments in HICL and InfraRed's approach to sustainability on Slide 24. I'll start off by making the same point here that I made at HICL's Capital Market seminar in January. Many like to think of a sustainability framework as a transaction screening exercise, and sometimes it is. But rather than just ruling entire asset classes in or out or rejecting specific transactions prima facie, more often it is about incorporating sustainability principles into the business case of the investment over the long term. And in this way, it can represent both risk mitigation, but also opportunity. Both the company and the manager have significantly evolved the sustainability frameworks in the year. We now see these permeating all avenues of the company's governance structures and day-to-day activities. Not only does InfraRed have sustainability principles embedded throughout its investment process, which is comprehensive, but also in the individual performance objectives of all staff and the ethos and culture of the manager itself, with the appointment of a dedicated sustainability manager and a clear commitment to reduce and offset the carbon footprint of the business. This sustainability mindset will remain a prominent feature of the company's business model, including with respect to InfraRed's origination and execution processes for new investments. And we've set out more detail on these processes on Slide 25. Over the 12 months to 31 March, InfraRed reviewed 44 new opportunities for HICL, carried out detailed due diligence on 23 of these and ultimately completed 3 investments in the period, set out on this page. The team continues to actively progress an additional 11 live opportunities for HICL. This illustrates the investment rigor that InfraRed applies of the 44 new opportunities. Assets were effectively screened out based on a number of factors, ranging from the competitive dynamic, which goes to pricing, specific project characteristics, risks or attributes that don't enhance HICL's investment parameters for yield, for example [Audio Gap] sustainability or GDP exposure at a time where we're content with the portfolio is waiting to demand. And it's also worth reiterating that accretive disposals remain an important lever for us to shape the portfolio, manage funding where necessary, and add to the company's net asset value. And we'll continue to use this lever as we've demonstrated in the year. At this point, I'll now pass back to Harry to talk through these final slides.

Thank you, Ed. As normal in this presentation, we also discuss the risks that the company faces. And the key risks for all infrastructure investors are political and regulatory and counterparty risks. The unusual one on this page is, of course, COVID-19, and we've heard in some detail about the asset level impact of the pandemic. So I won't dwell on this further, other than to emphasize the points that within the portfolio, infrastructure has continued to be available for use by end users throughout. Additional point I wanted to make here is that HICL service providers, including InfraRed, promptly enacted business continuity plans as the situation deteriorated and all that are operating normally, albeit largely from home and over videoconferencing. I covered the alleviation of political and regulatory risk during the overview at the beginning of the presentation. But just to repeat here that as they relate to HICL, we see both of these risks as having eased somewhat since the time of the company's interim results. Over the page, we cover counterparty risk. And just to give you some texture here, HICL actively autonomous HICL's key counterparty exposures, and more information can be found on this in both the annual report and in appendices to this presentation. One aspect of this active program is in relation to assuring the construction quality of the facilities within the portfolio. And as part of the ordinary course of asset management, we commission condition surveys, which, as you would expect in the portfolio of HICL's size, do occasionally reveal defects that need addressing. The purpose of being proactive is to ensure that HICL's construction subcontractors don't face any issues that come to light. And on occasion, we may need to use legal or contractual routes, such as adjudication to ensure the contractors accept their liability and indeed their responsibilities. And where we do so, there may be a temporary impact on the ability of projects to distribute to investors. And we regard this cycle of investigation and remediation as in a normal course of business for the management of a portfolio as broad and as diverse as HICL's. Also on this page, we've included a section on climate change. And this year, HICL has published a comprehensive sustainability report within its annual report. You'll see that the company has elected to adopt voluntarily the reporting requirements on the task force on climate-related financial disclosure or TCFD. And this isn't required for investment companies, but both the HICL Board and InfraRed remain committed to pursuing best-in-class transparency, and we are keen to give investors the information they need on sustainability matters. This reporting will evolve over time. And during 2020, we'll be undertaking a climate impact assessment of the HICL portfolio, and we'll report on this to shareholders in next year's annual results. I will now briefly cover the markets and outlook before we conclude. And as you would expect, we have monitored the market very closely since the COVID-19 pandemic started, and the trends have started to emerge. Firstly, we've yet to see evidence of distressed or forced selling of assets by contractors or developers. That doesn't mean that vendors won't start orderly sales processes in due course, but it seems that for the time being, most are taking a wait-and-see approach. Secondly, in the institutional markets, core infrastructure remains attractive. Although there's been relatively little fresh transaction activity, we are aware of 1 or 2 auction processes that have launched recently and have attracted interest. Demand for core infrastructure assets seems to be firm. The Oxford Economics report quoted on this page provides an overview, which does not vary greatly year-on-year of the estimated infrastructure investment needs in developed markets. We believe that this long-term theme is going to be reinforced by likely national responses to the economic impact of COVID-19. We expect governments to drive substantial investments in infrastructure, particularly in the core infrastructure of the modern economy, sectors such as fiber and infrastructure, to support the energy transition. As Ed mentioned, we explored these trends in some detail during HICL's Capital Markets seminar in January, and the presentation for that is on the HICL website. In terms of the outlook for HICL specifically, in the near term, we are focusing on continuing to actively manage the portfolio to protect the delivery of essential public infrastructure during this pandemic. Predating the pandemic, we have developed an attractive pipeline for HICL across its target market segments, and we will selectively progress opportunities while keeping a close eye on price discipline and seeking accretion to the existing portfolio. And to echo Ed, and how HICL always has done, we will continue to review occasional disposal opportunities if they benefit portfolio construction. So in conclusion, the financial year, just completed, saw 11 months of steady progress for HICL. Although offset by the impact of COVID-19 and changes in the macroeconomic forecast used in the valuation, underlying performance was solid and reflected the strength of HICL's diversified portfolio. HICL's balance sheet is well positioned with no drawings on the revolving credit facility, following successful capital raisings at the turn of the year, and the RCF itself have refinanced during the last couple of months. The company continues to focus on paying the sustainable dividend. COVID-19 lockdowns have had a temporary impact on near-term portfolio cash flow. And in this context, the Board has set a dividend target for the year ahead of 8.25p, which is in line with the year that's just completed. And overall, in the current environment, we believe that core infrastructure remains as attractive as ever, if not more so. And I believe that this theme and an attractive pipeline of opportunities positions HICL well for the future. Now that's the end of the formal presentation, and we're now going to turn to your questions. And I'm going to start with some of the research analysts that we have on the call this morning.

So just reviewing these, I see here some questions from [ Charlie Murphy at Milldam ] Investments. And one of those questions is in relation to the toll roads. And [ Charlie ] has asked; please, can you provide an update on how traffic loads have evolved since the period end. Ed, I think you covered this in the presentation, but it might be worth just repeating the update that you gave a few moments ago.

Yes. Happy to do so. So you may be aware that easing conditions have started to take place in France and also in Colorado in the U.S. So we've seen some uplift in the traffic numbers as of last week. So the A63 is running at 65% of budgeted revenues and Northwest Parkway at 35%. So both those numbers are in excess of where it was a few weeks ago.

Thank you, Ed. And we've got a question, which I'll direct to Keith here. And it's relation -- again, from [ Charlie ] It's in relation to Affinity Water. And this is, the annual report highlighted that Affinity won't be paying a dividend at 7, and how this impacts HICL's cash flows. Keith?

Thanks, Harry. Yes, [ Charlie ] is right to point out that the interims, we said we didn't anticipate getting -- receiving a dividend from Affinity Water in AMP7. So our forecast, I presented on Slide 10 take that into account. I think it's important to note that Affinity is generating cash. But essentially, that cash is being used to reinvest in CapEx in the current period. So in essence, it's investment for the future, and yes, once we're out of AMP7 into AMP8, yes, we will see a return on that investment in AMP8. But you are right to point out that the distributions in AMP7, but our cash flow forecast take that into account. And obviously, reducing the dividend guidance, we've looked at that and looked at stress scenarios around the cash flows.

Thank you, Keith. Another question from [ Charlie ]. I might limit it to 3 per analyst at this rate. But anyway, another question from [ Charlie ]. New acquisitions -- at the Capital Markets seminar, you highlighted corporate infrastructure as a possible source of new opportunities. How is the current environment impacting on your thoughts for these assets, i.e., are they proving as resilient as you thought or hoped? And I'll perhaps kick off with the thoughts on this, and I'll ask Ed to come in as well. I think if you look at the types of infrastructure we're referring to there, one example is fiber broadband. We actually see the prospects for this sector as being enhanced to some degree by the current situation because the importance of high-speed internet connections and a widely available access to fiber broadband has been highlighted with a number of people who are having to work from the home. It sounds pity, but we really do see this as spurring governments into action to ensure fiber rollout has accelerated in key developed markets. And Ed, have you got anything else you like to add on that from the other sectors that we'd be looking at.

I'd just add, Harry, that certainly, with respect to our deliberate efforts to diversify the portfolio, we've been deliberately trying to limit the portfolio's exposure to [ 21 ] factor. We see further investments in the corporate space as moving along that path and continuing to diversify the impacts, as we've noted over the last 3 years or so, it's been -- the things that come out of left field come from all directions, and they impact different sectors. So it's hard to put all your eggs in 1 basket, and we do think that continuing to diversify the revenue sources, the counterparties in the portfolio is the right thing to do. Additionally, through this crisis, I think you might find a number of corporate entities reassessing within their businesses, what remains core and what is noncore for their businesses. And so we may continue to see further opportunities popping up in this corporate space as businesses monetize assets that they don't consider to be core business.

Thank you, Ed. I've got a question here from Iain Scouller of Stifel. It's on High Speed 1. I understand very few trains operating daily. I assume High Speed 1 has played on a pathway of availability basis. Is there a risk that operators will request payment holiday if they're not using the line? So Iain, you're absolutely right. So the 2 operators to use High Speed 1, which is the Southeastern franchise and Eurostar, pay for train paths, and they book these in advance. They're contracted once they reserve those train paths. And as I think we highlighted on our investor call back in March, we have visibility on the train path bookings, at least until the end of the current calendar year. So that's the situation and those revenues from those different counterparties, Southeastern and Eurostar are backed by contractual obligations. We have a question here from Colette Ord at Numis. Can you give color on the GBP 50 million reduction in cash flows by reg and demand-based assets? I think Colette is probably referring that to demand-based assets. Keith, would you like to say a little bit more about that?

Yes. And I'm very happy to. So I mentioned in my presentation, we've taken a GBP 72 million reduction in relation to the impact of COVID-19 on demand-based assets, and that's a mixture of cash flows and discount rates. It's about GBP 52 million taken in cash flows. Obviously, you see majority or a good portion of that is within the current year's impact of lockdown. So we're not expecting any distributions in demand-based assets in 2020. But also as Ed has said, the effect on the demand-based assets that you need to push back the revenue line by about 2.5 years. So you'll see some in '21, but also a general pushing back in terms of cash flows. And on Slide 10, you could see a number of hollow bars, representing essentially deferral of cash flows on some of those demand-based assets. But just to say that our cash flows projections include all the impact, all that GBP 52 million anticipated reduction is within the forecast we've produced on Slide 10.

Thank you, Keith. I've got a question here from Alex Wheeler at Royal Bank of Canada. How are you seeing the secondary markets? Do you believe that the economic environment will continue to be supportive of valuations to infrastructure assets post the near-term uncertainty from COVID-19 as it was comprised in the pandemic? I mean, Alex, clearly, it's relatively early days in terms of understanding what the world is going to look like on the other side of this pandemic. But I think it's interesting to note what I was saying earlier in the presentation that where we are seeing 1 or 2 auction processes, which have been launched for infrastructure in the last few weeks, they are attracting interest. And obviously, we had to cut the valuation at 31st of March. Keith referred to the fact that we took a prudent decision to leave discount rates on PPP assets unchanged, but we are seeing some evidence, I think, of continued firm demand for PPP assets. And obviously, we'll reflect on all of this when we're putting together the next valuation of the portfolio at 30th of September, and on the intervening periods to the extent we see transaction activity, we'll take that into account. And a question -- another question from Alex here. Do you expect inflationary pressure as a result of government stimulus, which will ultimately benefit the portfolio in the medium term? And maybe I'll just make a couple of comments there. I've seen articles expecting inflation to go up and down. And yes, I think government stimulus -- fiscal stimulus might be expected to produce an inflationary burst, if you like. Another short-term impact on inflation can be things like currency devaluation as well as we saw after the 2016 referendum. I think, again, it's a little bit too early to say. But clearly, to the extent inflation does accelerate and if there is an attempt to inflate our way out of some of the debt we're going to be accumulating nationally over the coming weeks or months, though, I think the portfolio's inflation correlation clearly stands in at pretty good stead to capture that. That concludes the questions -- another question from Colette. Colette, you've asked another question about Affinity. I think we'll take that one off-line, if that's okay. I'm going to move now to some of the questions which have been coming in from the shareholders. And we've got the question here in relation to dividends and how we anticipate dividend cover will progress over the coming years. And I'll direct that to Keith in a moment. The first thing I want to emphasize, though, and this is in the context of the target dividend for the coming year, just to remind that the HICL's policy, its dividend policy, is to pay a sustainable dividend. And that -- we define sustainable as being a dividend at least as much as that paid in the previous annual year. And that's a basis on which we have a discussion with the Board. And Keith, do you want to make some comments about how we anticipate dividend cover progressing over the coming years?

Yes. I'm certainly happy to do so. I mean, it's really by reference to the forecast we present on Slide 10. That shows what we expect to receive from the portfolio. And I guess, as we mentioned, from March 21, we do not expect the dividend to be cash-covered. But looking beyond that, yes, we are -- March 21 is very much a one-off driven by COVID-19, the lockdowns. But looking forward, we are anticipating cash cover dividend. I think, it will probably be around 1.05x. If you look at underlying cash cover in the current year, if you take out the sort of profits on historic disposals, it was 1.03x cash cover. I think going forward, we expect it to be higher than that. And so sort of 1.05x, 1.1x range would be my expectation. But it's really -- look at the Slide 10 to sort of show you our current forecast for distributions.

Thank you, Keith. And then I think we've got time for 1 or 2 more questions. We have 1 here from a shareholder on COVID-19. And the question is, has there been additional costs to maintain public sector assets. Ed, would you like to pick that one out?

Yes, happy to, Harry. Yes, now -- so right to point to the changing operational conditions and patterns of usage within the hospitals, in particular, across the categories in the HICL portfolio. And certainly, there's been a lot of reorganization, including delivering special coronavirus pods or adapting cleaning and porting regimes or adjusting maintenance plans, et cetera. Typically, these are done through a variation framework, which is typical in PPP contracts. In the current climate, there are a large number of these, but these type of arrangements will deal with the cost as well as the change in service specs. So the answer is, yes, most likely. And then those will be dealt within the contractual framework within the PPPs.

Thank you, Ed. And we've got another question here. Last one from a shareholder on High Speed 1. How far out are the contracted bookings for train paths? That is as discussed on our investor call in March, the -- we have visibility until the end of the current year -- the current calendar year on train path bookings. And if the timetables get booked several months in advance as we go through the year, we'll start to get a better picture for train paths into 2021. Okay. I want to thank everyone for dialing into the call and then to listening to the presentation this morning. That concludes the question-and-answer session and the call will now end. Thank you very much.