HICL Infrastructure PLC (HICL) Earnings Call Transcript & Summary

This morning, you'll be hearing from HICL Fund Manager, Edward Hunt; CFO, Helen Price; and Ross Gurney-Read, who's a Fund Management Director here at InfraRed. The presentation will run for approximately 30 minutes, which should leave us plenty of time for questions afterwards. [Operator Instructions] I'll now pass over to Ed to start the presentation.

Thanks, Hal. Good morning. A very warm welcome to this sort of annual results for HICL Infrastructure PLC. I'm going to lead out on Slide 4 with a quick recap on HICL's proposition. HICL is a core infrastructure investor offering direct investment in the critical infrastructure that we rely on in our daily lives. These essential assets deliver resilient inflation-linked cash flows with exposure to powerful infrastructure megatrends in investors' hands, reliable income and capital growth from a diversified and liquid vehicle. We actively manage the portfolio for our performance, working to realize the potential of each asset while enhancing the portfolio overall with timely divestments and highly selective acquisitions. Every asset plays a role in the delivery of HICL investment proposition, and our model is to review that judiciously. Finally, the pedigree and track record of the company and InfraRed's manager. Over the 18 years since IPO, the company has returned 8.7% per annum on a NAV basis through all manner of market conditions, delivered by a specialist manager with over 160 people and 25-plus years of infrastructure experience globally. These components are reflected throughout the set of results, which I'll turn to now on Slide 5. This is another resilient result for the company, underpinned by active management and capital allocation discipline. On the left, over GBP 500 million of divestments, continuing HICL's long track record of asset rotation, which now totals over GBP 1 billion of disposals, contributing over 10p of NAV out performance since IPO. These divestments are important for 3 key reasons. Firstly, with a combined 11% premium to carrying value, the divestments reinforce the company's NAV and illustrate that disconnect that we continue to see between public and private market valuations for these assets. Two, the transactions provide a valuable source of funding, which has enabled us to reduce debt, repaying the RCF, rotating to selective acquisitions and buyback shares. And finally, and perhaps most importantly, these transactions support strategic portfolio construction and enhance the quality of the company's cash flow and earnings. That takes us to the middle column. The Board is guiding a return to sustainable dividend growth with guidance of 8.35p per share for FY '26. This reflects confidence in the cash flow generation from the underlying portfolio as well as the efforts over recent years to diversify, to rotate assets and to build out a long-term earnings profile for the company that is capable of supporting sustainable dividend growth. And it's this platform that underpins HICL's long-term success set out there on the right. The portfolio has a defensive core asset base positioned in strategic infrastructure growth sectors from where it seeks to deliver both income and capital growth for its shareholders. The current share price implies an expected steady state return of 8.9% net of fees, with a down payment on that of 6.5% through the dividend yield. Our job is to top that up further through our performance and by bringing the share price back to the NAV. Slide 6 sets out the key metrics for these annual results. Top left, we have the 4% reduction in NAV over the year. That reflects the 80 basis points increase in discount rates, partially offset by macroeconomic assumptions and accretive M&A. Top right, an underlying return from the portfolio of 9% for the year. That's excluding changes to discount rate and macro assumptions, that's well ahead of expectations, reflecting our active approach. The portfolio continues to perform well and is significantly insulated by design from broader macro volatility. Bottom left, accretive divestments in the year will enable us to fully repay the company's revolving credit facility, reducing interest costs and adding financial flexibility. And finally, bottom right, dividend cash cover of 1.37x or 1.05x, excluding profits on disposal. This has trended upwards. We expect it to continue to trend upwards, and it's that confidence that underpins the guidance back to dividend growth from April next year. Turning to Slide 7. We have been transparent in our efforts to position the company for long-term success and to construct a portfolio that will underpin the delivery of shareholder value for decades to come. Transaction activity in recent years has deliberately extended HICL's revenue streams, introducing assets positioned to capture real growth and to balance the increasing maturity of the group's PPP concessions. This strategic evolution is now reflected in HICL's asset base as set out in cash flow terms on this slide. Mature, shorter-life assets, providing a strong yield, essentially HICL's PPPs, complemented by assets with longer life, stronger inflation linkage and greater growth potential, i.e., more recent investments beyond PPP. To illustrate, HICL's yielders deliver a forecast 10% annual cash yield against a weighted average asset life of 14 years. That's balanced by HICL's growers, which are forecast to deliver a 10% annual growth rate -- sorry, a 10-year annual growth rate of 7% from an average asset life of 48 years. Naturally, as the second group matures, the growers of today become the yielders of tomorrow. And in this way, these complementary asset groups come together to build an earnings platform capable of delivering long-term dividend and NAV growth for shareholders. This assumes no changes to portfolio mix or assumptions. In reality, the company will pay out an element of these cash flows as a dividend and also re-investor portion. This reinvestment will enable us to grow out the back end of this chart and lift that rolling valuation, which you can see in the dotted line. And our forecast projected reinvestment alone will lift the valuation in 2050 by GBP 900 million to GBP 3.1 billion, supporting that NAV and dividend long term without requiring external capital. One final slide before I pass on to Helen, Slide 8. The macro environment continues to dominate markets and media, and this slide provides a perspective on HICL's total return proposition in the current market. This is a bottom-up analysis of the return that HICL can provide investors. HICL increased its discount rate in the year by 80 basis points to 8%, and this is the best guide to the expected gross return from the portfolio if the company was trading at NAV. The current share price adds to that further for a marginal buyer. The implied steady-state return on the share bought today is 8.9% net of fees. That is a 4.8% premium to risk-free rates and a 6.5% real return above our assumed inflation across HICL's markets. And again, of that 8.9% implied return, 6.5% of this is delivered by the dividend alone. As I mentioned, our role, our aim is to improve on that proposition, both through active management to deliver outperformance and secondly, by dragging that share price back up to the NAV through sound capital allocation and a compelling forward-looking strategy. Over to Helen now to step through the results in more detail.

Thank you very much, Ed, and good morning, everybody. So let's start with the NAV on Slide 10. Here, you can see the breakdown of the 6.7p decrease in NAV per share to 158.2p. Portfolio performance, the return on the investment portfolio contributed 13.8p. Within performance, you can see value preservation, which is the unwind of the discount rate of 12.7p, and value enhancements of 1.1, which largely reflect the profit on disposal of Northwest Parkway partially offset by the impact of actual inflation relative to our forecast assumptions for financial year '24. Changes to macroeconomic assumptions led to a reduction of 8p. In September 23, we increased the weighted average discount rate to 8%, a negative impact of 13.9p. This is partially offset by positive adjustments to forecast inflation totaling 3.8p and interest rates of 2.1p. Finally, the company incurred expenses of 3.7p and paid dividends of 8.25p. Before I move on to the investment portfolio, here is some more detail on our important metrics. So, we ended the year with net debt of GBP 304 million as we funded our investments in Texas Nevada Transmission, Altitude Infra and Hornsea II. And as of the 31st of March, the RCF was GBP 187 million drawn. Post year-end, we've received the proceeds from both Northwest Parkway and Hornsea II, and we've repaid our RCF. So gearing is now 7% on a like-for-like basis. Conservative balance sheet management is very important for the Board and the manager. And so, we're really pleased to have made such good progress in both deleveraging but also managing interest rate risk in such a volatile year. And finally, on the income statement side, the ongoing charges ratio increased to 1.14%. And now the disposals are complete. The management fee will reduce and the OCR will decline back to previous levels of around 1%. So here on Slide 11, you have the investment portfolio, which is the main driver of the company's performance. Firstly, just to reiterate, our investment process is unchanged. So, starting on the left, after acquisitions, disposals and cash distributions, the net portfolio value is GBP 3.2 billion. And this is the rebased valuation, and it's the basis for determining the underlying portfolio return. This return is GBP 286 million or 9% ahead of the 7.2% discount rate at March '23 because of the profits made on disposal. In addition, the 80-basis point increase in the discount rate reduced the valuation by GBP 280 million. And as usual, I'll cover our approach to discount rates shortly. Changes to economic assumptions generated $121 million. Most of this relates to changes in inflation and interest rate assumptions and our assumptions are included in the appendix. Overall, the net value of the portfolio declined to GBP 3.3 billion at the 31st of March, and our commitment remains GBP 65 million. Before I talk through our approach to discount rates, here's some more color on our transaction data to help set the scene. So, we've updated this slide, Slide 12, which we last presented in November to show what we're seeing in private M&A markets to help position HICL's market-leading approach to asset rotation. Over the last 15 months, we've completed 9 asset disposals at or above carrying value, generating a total of GBP 509 million. We've generated a multiple on invested capital of 1.8x and an IRR of 11%. And this is very healthy returns for our core infrastructure strategy. We've sold assets to multiple counterparties covering different sectors and geographies and totaling 13.5% of the portfolio as at March '23. All in all, this gives us confidence on the quality of our portfolio and the robustness of our NAV even in a difficult market. So, on this slide, we've updated the data we took you through in November and a dislocation between public and private markets. And there are 2 important takeaways from the charts on the left of the slide. Core infrastructure transactions are happening and private markets have capital to allocate. Our origination team say that transactions are picking up, and processes for good assets remain very competitive. For example, we're taking part in some for HICL, and in 2 instances, we didn't even make the second round because we have more than 10% of the price. This demand for infrastructure in the secondary market can be seen in the pricing discount only being 7% for 2023. And in contrast, the average discount for listed infrastructure at March 24 was 18%. Now comparing this to real estate, for example, where you can see the average discount for secondary transactions being 28% and the listed sector being 33. So, let's now turn to discount rates and sensitivities on Slide 13. As a reminder, in September, we increased the discount rate to 8%. And in particular, we raised the U.K. rate by 100 bps and the rest of the portfolio by between 20 and 60 basis points. Although HICL can point to its transaction activity, when setting the rate at the 31st of March, we also considered the following: firstly, government bond yields. Over the last 12 months, the average 20- to 30-year U.K. bond yield has increased by 58 basis points and rates in the rest of HICL's jurisdictions have been -- have increased by up to 67 basis points. And secondly, the equity risk premium. We want to make sure we maintain an adequate risk premium, which we think should be at least 3%. And in addition, we need to reflect jurisdiction-specific volatility. Overall, conditions remain largely unchanged over the second half of the year with no obvious evidence that discount rates should move either way. And very specifically, we think the premium we achieved on Northwest Parkway reflects 100% disposal to a strategic buyer. So, at the 31st of March, we maintained the discount rate at 8%. Within this, HICL's average risk-free rate is 4.1%, and the implied risk premium is 3.9%. On the right-hand side, you can see the 2 key sensitivities around our valuation assumptions expressed in the NAV per share impact. And as in prior periods, the inflation correlation provides a helpful offset against our discount rate sensitivity. And you can find the remaining sensitivities on the -- on Page 48 of the appendix. So now moving on to our slide on portfolio company gearing. So, excluding holding company debt, the portfolio is 68% geared, and the Board is comfortable with this because only 13% of the portfolio's debt needs to be refinanced at all. And of this 13%, only 2.5% is refinancing in the next 2 years, and this is namely our 2 regulated utilities, TNT and Affinity Water. But overall, the gearing of the assets that need refinancing at all is lower at 50%. Lastly, on Slide 15, after several years of holding the dividend to 8.25p, the Board has announced a return to dividend growth in FY '26. We are pleased to have delivered what we said we would, repositioning the portfolio and focusing on long-term earnings growth to deliver a sustainable dividend. Here, you can see that the dividend cover has increased over the last few years and is forecast to hit 1.1x by 2026. Why is this? The portfolio is starting to see the benefit of its inflation correlation. In addition, we're seeing growth in the demand assets such as A63, leading to more distributions, and we've sold lower-yielding assets to repay a relatively expensive RCF. In particular, we're really pleased to see the recovery in the dividend cover. And we think 1.1x is an important threshold for the fund. Lastly, all of this has been done while our largest asset has not been distributing. To indicate how we could move on from here, the potential uplift from assets resuming distributions is 0.1p, and we hope to be able to update investors on this in due course. I'll now hand you over to Ross, who will take you through portfolio performance.

Thanks, Helen. Good morning, everyone. Before I do jump into portfolio performance, it is worth revisiting the company's market positioning, which you can see here on Slide 17. HICL is a core infrastructure investor. All of our assets positioned at the lower end of the infrastructure risk spectrum and benefit from 3 key characteristics: firstly, high cash flow quality through contracts, entrenched demand or regulated revenues; secondly, defensive market positioning that means high barriers to entry and low competition and criticality. These are essential assets that provide the backbone to society. This framework guides our approach to new acquisitions and also describe the existing portfolio, which is summarized over the page on Slide 18. Now you'll be familiar with the charts on this slide, which really draw out quite how diversified HICL's portfolio is across sectors, geographies and revenue types. Our active approach to portfolio construction is a central part of the company's business model. The acquisitions and disposals we made during the year were deliberately chosen to improve key metrics and diversify risk. On the right-hand chart, you can see that PPPs make up 58% of the portfolio by value, and another 4% comes from HICL's OFTO investment. These generally performed in line with expectations, thanks to their availability-based revenues and largely fixed costs. The 5 largest assets make up around one-third of the total portfolio value. For the first time, you'll see we've included some additional sensitivities on each of the following slides as well as the usual update on performance, which I'll now step through starting with Affinity Water on Slide 19. This is HICL's largest investment, just over 8% of the portfolio by value. And it's always worth highlighting that Affinity is a water-only company with no responsibility for sewerage services. The company submitted its PR24 business plan in late September, and we're expecting to receive the draft determination in early June. This should give us a good indication of what we can expect from Affinity, but we take comfort from the fact that the management team was able to submit a plan that balanced significant investments, the lowest bill increases in the sector and the resumption of equity distributions at a reasonable level. From an operational perspective, performance in the year has been solid. Affinity continues to be ahead of target on leakage reduction. And although some ODI penalties were incurred, these were broadly in line with our expectations. The company's day to day operations are underpinned by a resilient capital structure with credit ratings 2 notches above Ofwat's requirements, very limited holdco debt and no refinancing requirement until the next regulatory period. The uncertainty around the draft and final determinations is reflected in HICL's valuation of Affinity, which has remained stable over the year. More broadly, the company's robust business plan and improving operational performance should mean that it is well positioned as we reach the conclusion of PR24. On Slide 20, we provide some detail on HICL's demand-based assets. And this segment of the portfolio has now reduced from 19% to 14% following the disposal of Northwest Parkway, which I will pick up on later in the presentation. So, starting with the A63, which now represents nearly 8% of the portfolio following the incremental acquisition we announced just before Christmas. You can see from the slide that traffic continues to grow steadily and has generally outperformed our valuation assumption. The slight dip you can see here in the summer months relates to an accident, which prevented toll collections, but we are expecting full revenue and cost recovery through insurance. The valuation has benefited from inflation-linked tolls as well as cost savings achieved by the management team. Although the levy on long-distance transport infrastructure has now been enacted, this is currently being challenged in court. And even if it is eventually imposed with no compensation, we don't expect a material financial impact for the A63. Moving to high-speed one. The domestic services continue to be booked at levels below the contractual revenue underpin, although it is encouraging to see that there will be a 10% uplift in services from June onwards. Although bookings are not expected to return to pre-COVID levels until 2028, this really is a key first step and indicates growing underlying demand. On the international side, Eurostar bookings for the year were slightly ahead of our valuation assumption with distributions resuming around 6 months earlier than expected. You can see from the chart that bookings were slightly softer in the second half of the financial year, but have since rebounded. In the short term, Eurostar has already committed to 94% of the pre COVID timetable between now and the end of 2024, and we do expect a further boost from additional spot path bookings during the Olympics. Looking a bit further forward, we do think the asset is strategically well placed. The management team and Eurostar have been collaborative preparing for new border requirements, and discussions continue to progress with 3 potential new operators for international services. These are being led by new CEO, Robert Sinclair, who joined HS1 in March. Robert brings a wealth of experience, most recently as the Chief Executive of London City Airport and is well positioned to steer the company through the next phase of its growth journey. On Slide 21, we cover the third and fourth largest assets in the portfolio. Both of these fit firmly into the growth bucket that Ed was describing earlier. They have indefinite lives, earnings forecast to increase over time, and they stand to benefit from the megatrends of digitalization and decarbonization. So, starting with Fortysouth, where here, the carve-out of all of the operations from One NZ is now complete. The company started operating as a fully stand-alone entity on the 1st of April '24, in line with what we assumed at the time of acquisition. Now despite being fully independent, Fortysouth's revenues are underpinned by an availability-based inflation-linked and [contingency] contract with One NZ. During the year, the management team has been focused on further enhancing revenue visibility and earnings growth by securing additional co-location opportunities. Given the complexity of some of the negotiations, the level of co-location was slightly behind our expectation in the year, but we do expect this to be caught up quickly, and this is evidenced by the agreements reached with Spark and Cordia shortly after the year-end. The management team has also successfully accelerated Fortysouth's tower upgrades program to help meet New Zealand's 5G rollout. It's on track to deliver nearly 300 new towers over the next 4 years and is also exploring potential CapEx savings as it takes control of the tower deployment program going forward. Moving to TNT. Both Cross Texas Transmission and one Nevada transmission continued to perform very well operationally as demonstrated by the availability over the year, which you can see on the slide. InfraRed's local asset managers continue to work closely with co-owner and operator LS Power, both from an operational and financial perspective. This led to the execution of an improved hedging contract, which partially mitigated the impact of higher actual and forecast U.S. interest rates and ensure that distributions were in line with our expectations. The company's next refinancing event is expected to occur later this year, but the techs and regulatory mechanism enables a full pass-through of costs at the asset level. During the year, the management team has also identified several opportunities to connect new power generation sources to the grid. All other things equal, this would result in incremental CapEx, which would positively impact the valuation, but be more capital intensive. And these dynamic highlights we like to constantly manage the composition of the portfolio. And the next slide on 23 shows how we've done that over the past year. So I won't dwell too long here, but hopefully, this slide brings to life the portfolio rotation that Ed was talking about at the start of the presentation. You can see that the transaction activity has been heavily and quite deliberately weighted towards disposals, comprising none assets worth over GBP 500 million. This supported the acquisition of 2 high-quality modern economy assets in Altitude Infra and Hornsea II OFTO as well as the incremental acquisition in the A63, which generated 0.7p of NAV accretion. InfraRed's long track record of selling assets for HICL is set out in the appendix on Page 42, and we do frequently review the entire portfolio to identify strategic disposal opportunities. Our ability to adapt this framework was demonstrated in the year with 2 very different transactions. Firstly, the PPP portfolio sell to John Laing, which I covered in a bit of detail in November, but more recently, the sale of Northwest Parkway, which we set out on the next Slide 24. HICL acquired Northwest Parkway in late 2016 as part of a deliberate strategy to diversify the portfolio away from U.K. PPPs. By taking equal shareholding alongside 2 like-minded partners, we were able to bring InfraRed's extensive toll road expertise to bear from day one. Traffic growth was faster than we expected in the first 3 years of ownership, thanks to active management and prudent acquisition assumptions. And the asset also had some key characteristics, which made it particularly attractive for a core infrastructure investor. Demand was underpinned by the road's proximity to Denver Airport, and toll increases were based on a triple lock mechanism, which enabled increases at least in line with inflation. Once we've successfully navigated COVID-19 and see the distributions resume, we took the opportunity to lock in the value generated by the asset initially through a smaller partial disposal, but subsequently through the recent sale to [indiscernible]. By deciding to participate in a full disposal process alongside the co-shareholders, InfraRed ensured that HICL was not left in the asset as a minority, but could instead benefit from the premium a strategic buyer would pay for full control. And on the bottom right of this page, you can see what that translated to vehicle, a 13% holding period return and over 2p of immediate NAV uplift. Equally importantly, though, was the ability to capitalize on previous growth to recycle an asset with lower forecast yield. And this underpins the dividend guidance that's been issued today. So on that note, I'll hand back over to Ed, who will explain how we approach capital allocation and also touch on the outlook going forward.

So I'm now on Slide 25. Appropriate and effective capital allocation is front of mind for the Board and InfraRed. It's been central to the decisions to accelerate strategic disposal activity, completely repay floating rate debt, launch of $50 million buyback, increase the dividend from next April and execute highly selective acquisitions when compelling risk-adjusted opportunities arise. It is recognized that the bar for new investments remains very high, as informed by the relative proposition of additional buybacks. We are seeing pockets of opportunity in the market and where these offer a compelling risk-adjusted return require only modest RCF drawings and are expected to materially enhance the portfolio, we will explore these selectively on a case-by-case basis. Equally, we continue to explore further divestments where there is a compelling strategic rationale. All investment and divestment decisions continue to go via HICL's board. Longer term, the outlook for infrastructure investment remains very supportive. Underlying infrastructure investment needs continue to be pushed at pace by those 3 megatrends of digitalization, decarbonization and demographic change. The state of infrastructure decay across HICL's markets is pronounced, matched frankly by the fragility of government balance sheets, and there's increasing competition between jurisdictions to attract capital. These conditions provide a foundation for the greater use of private capital to support infrastructure development, and we expect this environment to be strongly supportive of the company's strategy going forward, including with respect to the existing portfolio. Finally, to wrap things up on Slide 27, a productive year for the company that has met a number of significant capital allocation milestones. We completely repaid the floating rate debt, we have resumed dividend growth from FY '26 and launched the buyback program. This has been enabled through over GBP 500 million of selective divestments, which has enabled us to capture value through asset rotation and improve the quality of the company's cash flows and earnings. And from here, HICL is set up for success. The portfolio is performing well, notwithstanding broader macro volatility. The balance sheet has been enhanced, providing a more robust platform and greater flexibility and in successfully evolving HICL's portfolio over recent years, the company benefits from an enhanced cash and earnings platform from where it can deliver long-term sustainable income and capital growth for shareholders. That concludes the presentation, and now happy to turn over to Q&A.

[Operator Instructions] We will start with Iain Scouller.

It's Iain Scouller from Stifel. I've got 3 quick ones. Firstly, on commitments, I think outstanding commitments are about GBP 65 million to a couple of projects. One of these is expected to be drawn down? The second one is on Affinity. I think you've indicated, depending on the final determination at the end of this year you may put in some more equity. Can you give us a bit of an indication as to the potential size of that? And then the third one is on the inflation correlation. That's down to 0.7x from 0.8x. Does that just reflect the disposals during the year?

So I'll do commitments and inflation and then Ross for Affinity. So our commitment to 2 assets, so Blankenburg and [indiscernible] are also 26 and 27 for those 2. So not too far off. And then in terms of inflation correlation, yes, absolutely, Northwest Parkway disposal.

And so on Affinity, you're right to say that as part of the business plan submission, all of the shareholders indicated that they may be willing to inject some initial equity into Affinity Water to fund the investment in the CapEx program in AMP8. That's not a binding commitment at this stage. It is very much dependent on the determinations. But the quantum that was put in to the business plan was GBP 150 million at 100% level. So that would be 50 million HICL share.

[indiscernible] from RBC. Just 3 for me as well, please. Obviously, RCF has been repaid now. So just curious to see whether you're still thinking actively about further disposals. Second point is on HS1. Page 20 shows 0.8p per share impact from 0.5% growth rate with 3 potential parties now looking to set up franchises in HS1. Just curious to know in terms of how much capacity remains from a technical perspective on the line and whether a 0.5% growth rate is potentially quite prudent, rather 0.5% growth rate increase? And the third point is just on the investments going forward. How are you thinking about it in terms of target return, bearing in mind the buyback and the implied return central there?

So on the RCF yes, you're correct to say we've repaid that balance. We will continue to look at the portfolio in the way we always have done on disposals, and we will look to identify whether or not there are assets that we would like to dispose for portfolio construction reasons, but we are in no rush to do so.

I'll take HS1 and then hand back to Ed for the final question. So in terms of the sensitivity that we've put in here, what we tried to do here is across the give assets, give you an indication of what might happen if certain key assumptions change. And you're right to say that on HS1, the international train path growth is really the key valuation driver. In terms of the technical capacity of the line, we're very comfortable that there's plenty of capacity. And I think you see that mirrored example in announcements from Getlink, where they've clearly pushed towards attracting your operators onto the service. Whether or not 0.5% would be the assumption going forward. That's really not what we're saying here. It's to give you an idea of sensitivity. In terms of how we're seeing it in our valuation at the moment, we take quite a conservative probability-weighted view to any one of the new operators eventually coming into running a service. There are a few key hurdles that obviously need to be met, not least, procurement of new rolling stock. But you could be sure that if one of those operators were to eventually make it through that you'd probably see an increase in the CAGR that you've got here and that would lead to a valuation outlook.

And then in terms of how we're looking at new investments, you're right to point out that the return available from buybacks needs to be a key consideration in looking at new investments using our discount rate sensitivity and applying the share price discount. We calculate that, that equates to a return hurdle of around 10%. So that's a relevant consideration. It's not the only consideration when we're looking at portfolio construction. So we're also looking at the contribution that incremental assets can make to yield to asset life and the overall risk-adjusted return that they offer the portfolio. Certainly, we see the value in buybacks as to a number of our shareholders and so we've made that commitment around buybacks to date. It's an important lever for us to pull. It's not the only lever. I think when looking at the market, we do see pockets of opportunity where we may have a specific angle or there is a buyer seller and balance around the transaction where we can get excess returns. I would highlight the A63 transaction as one of those. And that really remains our focus going forward to be nimble and opportunistic.

Just 2 clarification questions really if I may. What is the sort of multiple in the current affinity valuation? You've given us the sensitivity, but can you tell us what the base case is at the moment? And second of all, can you just talk through the sort of the GBP 900 million reinvestment comment you made out to 2015 in terms of keeping given the value held. Can you just talk about what other assumptions are in that in the context of your sort of running forward of dividend cover, et cetera? What do we need to know about that number?

So as these cash flows come through the portfolio, a lot of that's income and there's an element of capital in there as well, especially considering as the PPPs mature and return those larger cash flows at the end of the concession life. So as these cash flows come in, we'll continue to distribute that to shareholders via the dividend, but there will be an element over and above that, which is for reinvestment. We, at this stage, we're not providing long-term dividend guidance to help you with the relative ratios. But what that means is that as that capital comes out of the portfolio, there's the opportunity to reinvest that into new assets as well as potential growth in existing assets. And as we do that, it allows us to build out the return profile over the long term even more from existing resources.

Is that net of the 150 repayment [indiscernible] in cash flow.

Yes, that's right. So, the private placement allowed us to start that reinvestment process even earlier. So, by matching the private placement maturities to effectively the asset life of the PPP portfolio. That's allowed us to bring forward those capital redemptions and to invest. So, in some ways, we've already sped up that process. But yes, we see incremental reinvestment.

It's Conor Finn from Barclays. On Slide 15, you've talked about the FY '26 dividend and the uplift in dividend cover. Does that -- you've included an increased level of distributions from assets that currently aren't distributing? Does that reflect a full year? And what would the kind of pro forma be if you did include a full year?

So we're expecting Affinity to start distributing in calendar year '25 or financial year '26. We haven't included Affinity within our dividend assumptions by '26 in terms of the rationale behind the increase of the dividend. That was actually driven by the impact of inflation correlation and growth assets and also repaying the RTF. The 0.1p that comes from assets recommencing distributions in 2026. That's largely the impact of Affinity. So that should give you the color you need.

Is that 0.1 reflecting 12 months?

Yes.

It's Nicolas Vaysselier for BNP Paribas Exane. Just 2 questions on my side. You've mentioned in your press release and presentation like no need to go back to the equity capital markets for potential new investments. So, I'd like you to elaborate a bit on that. What's your organic cash generation in the coming years after payment of dividend and any potential debt repayment as well that could be put to work for acquisitions? Or what's your approach to leverage now given the current cost of debt, but also your rapid deleveraging? And maybe as well, second question, still on the investment approach. You've talked a lot about the recent investments you've made in rotating the portfolio towards more growth like assets. What could be the limit in terms of the portfolio mix you put on such assets given that, yes, it's attractive cash flow profile for the future, but also comes with some additional demand risk?

Thanks, Nicolas. So, I will have a crack at those, and Helen might jump in on some of them as well. I think in terms of equity market access, I think what we're highlighting is that over the year, we have very much lived within our means, and we have a strategy that enables us to continue to live within our means, even if access to equity markets is not available. Clearly, in due course, we would like to be able to access equity markets to assist in the company's strategy, but it's not essential. There's 2 elements within that. One is the reinvestment that's coming out of the portfolio, which I've just highlighted before. And the other element is continuing asset rotation through divestments and rotating that into other assets. So, there's 2 elements of that approach. In terms of leverage, we'll continue to review the role of leverage in the portfolio. Clearly, leverage is coming down over time within the underlying assets as PPPs repay their debt. And that's something that we consider, but no immediate plans to do anything there. And I think more broadly on portfolio construction, it's worth highlighting that we are very mindful of the balance that needs to be created between the short-term yield and the long-term growth assets. You've seen in the year that whilst we have rotated a number of PPP assets out of the portfolio and brought in some new exciting more modern economy assets with growth potential. We've also rotated out of Northwest Parkway, which has served to bring the yield up and reduce demand correlation within the portfolio. So it is a balanced approach and one that we'll continue to judge dynamically over time as to how assets are performing and how different parts of the portfolio affected by the broader environment.

That's it for the in the room, there's a couple of online questions that we'll go to. So one for Ross, on Affinity from [indiscernible]. Pennon yesterday reduced its final dividend to reflect fines from SES Water and indicated future dividends would consider fines and ODI penalties. How are you thinking about future distributions and ODI performance?

I think what we highlighted this year is that Affinity did incur a small amount of ODI penalties but these are very much factored into the management team's assumptions and indeed into our valuation. I think going forward, we're not assuming any particular assumption on massively outperforming on ODIs nor underperforming on ODIs for the next business plan submission. It's a neutral business plan there. I think the key point to make with Affinity is that while it is incurring some ODI penalties, these are in areas that are relatively expected. And what I mean by that is the bulk of them are coming from per capita consumption, which is an area that all the companies are struggling with given changes in water usage post COVID-19. What Affinity is not seeing that we're seeing elsewhere across the sector is performance-related fines for perceived under investment, for example. So that's something that is impacting others and that's not necessarily impacting Affinity, and we don't expect that to impact our view on distributions going forward.

One from Richard Curling at Jupiter Fund Management. I want to understand the apparent disconnect between inflation correlation and the relatively smaller inflation the dividend increase against inflation rates.

So in terms of how inflation goes through into the portfolio, it does take time from a cash perspective. So, a number of reasons. You've got to reissue new invoices. That only happens once a year. You have to hold increased money back for your life cycle reserve account to reflect the impact of inflation on costs. So, whilst we can make immediate changes to inflation assumptions when it comes to our net asset value, the impact that it has on cash does take time to come through. And then secondly, 2 of our most correlated assets to inflation, namely Affinity Water and High Speed 1. We're not distributing High Speed 1 has clearly recommenced distributions, but Affinity isn't distributing and that also has an impact.

And another one for you, Helen, from Marcus Jaffer [indiscernible]. Why is the letter of credit facility not included in the net debt figure?

Because it's not a balance sheet debt amount, it's off balance sheet. So the net debt is only made up of your RCF, your private placement and then offset by cash.

And the second question from Marcus, for Ed. Given the sensitivity analysis that we looked at secondaries pricing in this deck and there seems to be a disconnect? Why are there than new acquisitions being funded for such a disconnect you're seeing?

So as I mentioned, our approach to new investments is highly selective and really focused on those areas where we do see an angle for InfraRed. We do see some type of special situation where there's a buyer seller imbalance, and we're able to extract excess returns from that. So, it's not a case of lining up in private market auctions and seeing where we get to by any stretch, but it's recognizing that in market disruption, there can be opportunities. And these opportunities could be highly accretive for the portfolio long term and help us build out the portfolio construction effectively. So certainly, there is a balance there, and we've allocated a certain amount of cash to buybacks in recognition of that disconnect. But we're also not dogmatic about avoiding attractive opportunities where we see them in private markets.

That's all the questions that we have online. So, I believe that takes us to the end of the presentation. I'd like to thank you all for joining online and in the room, and we'll have a great rest of the day.