HICL Infrastructure PLC · LSE:HICL
HICL Infrastructure — Investor Presentation (February 2016)
63 slides from HICL Infrastructure's investor presentation, Feb 4, 2016
Slide 1: Capital Markets Seminar: Delivering Real Value
Capital Markets Seminar Delivering Real Value 4 February 2016 hicl.com
Slide 2: Disclaimer
Disclaimer By attending the meeting where this presentation is made, or by reading the presentation slides, you agree to be bound by the following limitations: This document is an advertisement and is not a prospectus. Any decision to purchase shares in HICL Infrastructure Company Limited (the "Comp
Slide 3: Value Preservation
Value Preservation Health & Safety Executive Merseyside Headquarters
Slide 4: Value preservation
Value preservation Delivery and contract performance ▲ What do we do? Drive physical delivery of construction and operations Ensure contract performance ▲ How do we do it? Experienced team Proactive approach Manage key relationships Robust risk management framework ▲ What does this mean
Slide 5: Central Role of Asset Management
Value Preservation Central Role of Asset Management Health & Safety Executive Merseyside Headquarters
Slide 6: Typical project structure
Typical project structure Asset management responsibilities in context Other Equity stakeholders (HICL) (users) Client Senior debt Insurers Bank / bonds Project Company 00 Project Company FM manager Design & provider build hicl.com | 6
Slide 7: Experienced team
Experienced team Resourced to deliver ▲ Dedicated team 14 experienced asset managers Over 250 years of relevant industry experience - 18 years average Support from wider InfraRed team Executive Management involvement ▲ Full complement of relevant skill Construction, Engineering, Quantity S
Slide 8: How we preserve value – active management approach
How we preserve value – active management approach Proactive board level stewardship ▲ Effective due diligence pre-acquisition Assessment of technical reports, asset inspections and operational reviews ▲ Focus on value added involvement post-acquisition Effective transition planning Strategic
Slide 9: South West (Enniskillen) Hospital
South West (Enniskillen) Hospital hicl.com | 9
Slide 10: South West (Enniskillen) Hospital
South West (Enniskillen) Hospital hicl.com | 10
Slide 11: South West (Enniskillen) Hospital
South West (Enniskillen) Hospital hicl.com | 11
Slide 12: How we preserve value – relationship management
How we preserve value – relationship management Being a good partner is key ▲ Thousands of people interact with our projects every day ‘Live’ projects, broad range of stakeholders (e.g. client, subcontractors, end users, etc.) ▲ Focus on productive working relationships with key stakeholders Par
Slide 13: How we preserve value – relationship management
How we preserve value – relationship management Operational efficiencies Source: InfraRed hicl.com | 13
Slide 14: How we preserve value – risk management
How we preserve value – risk management Ensuring a robust risk management framework ▲ Robust governance of projects – safeguarding investment ▲ Comprehensive review of Quality Management Systems (QMS) Operational procedures Financial procedures Management structure ▲ QMS review – preliminary f
Slide 15: How we preserve value – risk management
How we preserve value – risk management Ensuring a robust risk management framework hicl.com | 15
Slide 16: Asset Management: Tools of the Trade
Value Preservation Asset Management: Tools of the Trade Health & Safety Executive Merseyside Headquarters
Slide 17: Managing lifecycle costs
Managing lifecycle costs A key determinant of value and asset performance ▲ What are Lifecycle costs? Costs of undertaking major maintenance and asset replacement; large technical equipment ▲ Detailed plans and management tools to optimise whole life costs and minimise risk of asset failure Asse
Slide 18: Managing contract changes
Managing contract changes ‘Variations’ are important ▲ What are Contract Variations? Changes to the terms of the Concession Contract A common feature, typically initiated by public sector clients to support business change Needs careful management ▲ Reactive strategy Case by case assessment
Slide 19: Phase 1 – Paediatric assessment unit infill in courtyard
Phase 1 – Paediatric assessment unit infill in courtyard hicl.com | 19
Slide 20: Phase 15 – remodel neo natal services
Phase 15 – remodel neo natal services hicl.com | 20
Slide 21: Barnet Hospital
Barnet Hospital hicl.com | 21
Slide 22: Barnet Hospital
Barnet Hospital hicl.com | 22
Slide 23: Barnet Hospital
Barnet Hospital hicl.com | 23
Slide 24: Managing operational issues
Managing operational issues Firestopping – a live example being actively managed ▲ What is the ‘Firestopping’ issue about: Failings in either the construction, and/or maintenance, of certain fire protection measures No consensus over contractual requirements; multi-party responsibility ▲ What ar
Slide 25: Firestopping
Firestopping MAN Infrastructure hicl.com | 25
Slide 26: Managing responsibly
Managing responsibly ESG – an essential for preserving value ▲ ESG can materially impact investment and corporate performance ▲ We're proactively driving good ESG practice throughout the HICL investments Adoption of ESG policies in line with good industry practice Active monitoring and evaluatio
Slide 27: ESG community engagement
ESG community engagement Oasis Academy (Croydon Schools) and University of Sheffield Accommodation hicl.com | 27
Slide 28: Summary
Summary Value preserved by an experienced team of 14 with a proven track record ▲ Active project board-level involvement, ▲ Robust risk management approach stewards of the projects ▲ Seek to prevent issues before they arise, ▲ Using and improving best practice for all proactively solve issues when t
Slide 29: Value Enhancement
Value Enhancement Oldham Library
Slide 30: What does value enhancement mean for investors?
What does value enhancement mean for investors? Potential to increase returns ▲ Infrastructure offers long term predictable cashflows ▲ Value enhancements should not be a large risk / reward for investors Value enhancements deliver outperformance to base case Enhancement Public sector clients be
Slide 31: What is value enhancement?
What is value enhancement? Increasing distributions to shareholders Forecast gross cash receipts £350m £300m £250m £200m £150m £100m £50m - 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047
Slide 32: Individual project cashflows
Individual project cashflows Enhancements focus on ‘variable’ cashflows Purple Equity returns Grey Fixed costs Equity Pink ‘Variable’ costs Tax Lifecycle Insurance SPV costs Management costs Debt service service FM costs Source: InfraRed. Sample HICL investment hicl.com | 32
Slide 33: Value enhancement options
Value enhancement options Fund level, project specific and portfolio wide Group level Accommodation Education Fire, law & order Health Transport 10 projects 39 projects 13 projects 31 projects 9 projects Portfolio wide hicl.com | 33
Slide 34: Value enhancement options
Value enhancement options Fund level, project specific and portfolio wide Asset management Portfolio management Treasury Cost Group Disposals management management level Co- Distribution shareholder Financing efficiency acquisitions Project Tax claims Energy Model Company Lifecycle & loss Portfolio
Slide 35: Refinancing - HICL debt facility
Refinancing - HICL debt facility Fund level enhancement ▲ New facility negotiated in Q4 2015 expiring Q2 2019 ▲ Increased facility and tenor on improved terms ▲ Annual savings of c.£0.9m p.a. ▲ Funds new acquisitions prior to capital raising New facility Old facility Nov 2015 Mar 2014 Credit Availab
Slide 36: Refinancing – Project Company debt (1)
Refinancing – Project Company debt (1) Driver for refinancings are debt margins not interest rates ▲ Project companies have long term debt in place at financial close1 ▲ Refinancing gains are generally shared 50:50 with public sector clients ▲ Driver for refinancing is reduction in debt margins ▲ Pr
Slide 37: Refinancing – Project Company debt (2)
Refinancing – Project Company debt (2) Many stakeholders – number of challenges Project + Lenders share- new Project holders legal Lenders Gain advisor existing share Addit- Docu- ional ments Escalat- Project Termin- debt Tax & ing financial ation account- advisor advisors liability Swap ing fees Mo
Slide 38: Refinancing successes
Refinancing successes Back on the table post financial crisis Colchester Garrison Staffordshire LIFT ▲ 2009 ▲ 2015 ▲ Early bond prepayment from ▲ Replaced lender to remove surplus land sale proceeds cash sweep Central Middlesex Hospital Aquasure Desalination ▲ 2011 ▲ 2015 ▲ Basis swap to benefit fro
Slide 39: Lifecycle: a risk and opportunity (1)
Lifecycle: a risk and opportunity (1) Careful management of risks to realise value ▲ Lifecycle expenditure is becoming a prominent focus ▲ Active management by the Asset Management team creates potential HICL portfolio lifecycle spend forecast 80 70 60 50 £m 40 30 20 10 0 Source: InfraRed. Estimated
Slide 40: Lifecycle: a risk and opportunity (2)
Lifecycle: a risk and opportunity (2) Sizing the opportunity ▲ Lifecycle risk can be with either subtracted or an equity risk / reward ▲ Approximately half of HICL portfolio has lifecycle risk with the Project Company ▲ Active management of expenditure while working with public sector clients and FM
Slide 41: Insurance (1)
Insurance (1) Portfolio Insurance creates value for the public sector and HICL ▲ Contractual requirement of PFI / PPP projects to insure the assets ▲ Important part of risk transfer ▲ Mutual benefit for public sector client and equity through insurance sharing mechanisms ▲ PFI low claims history dri
Slide 42: Insurance (2)
Insurance (2) Leverage scale through insurance portfolio ▲ One of the largest Infrastructure Broker Primary underwriter insurance portfolios with 57 HICL investments, 62 in total1 including other InfraRed funds ▲ £7bn of assets insured2 70 180 19 projects ▲ Around 20% year on year savings added to 1
Slide 43: Project Company Management (1)
Project Company Management (1) Partnering approach based on best practice and industry knowledge ▲ Day to day management of all aspects of the project ▲ Majority of projects have contracts with specialist providers, and a few have directly employed staff ▲ Diverse range of Project Company Management
Slide 44: Project Company Management (2)
Project Company Management (2) Getting the balance right between fees and depth of service ▲ Portfolio scale creates opportunity in terms of service delivery as well as price Standardised Group MSA contract ▲ HICL’s Project Companies spend around tendering of with specified £12m1 per annum on manage
Slide 45: Summary
Summary Improvement for investors and public sector clients ▲ Value enhancement delivers incremental returns above the base case ▲ HICL leverages benefits using InfraRed’s knowledge and expertise ▲ Working with our public sector clients to create mutual benefit ▲ Numerous small value enhancements al
Slide 46: Value Accretive Investment
Value Accretive Investment M80 Motorway
Slide 47: Defining a ‘value accretive investment’
Defining a ‘value accretive investment’ InfraRed applies rigorous investment evaluation criteria to all new opportunities ▲ InfraRed evaluates three key parameters when assessing new HICL acquisitions: Total return Yield Degree of inflation linkage ▲ A project may offer value accretion to the
Slide 48: Value in the Eye of the Beholder
Value Accretive Investment Value in the Eye of the Beholder M80 Motorway
Slide 49: The problem with IRRs / discount rates in isolation (1)
The problem with IRRs / discount rates in isolation (1) Headlines can distract from underlying cash flows ▲ Investors spend significant time focusing on discount rates – common questions being: What are the IRRs being used by HICL to bid for new investments? What discount rates does HICL use to
Slide 50: The problem with IRRs / discount rates in isolation (2)
The problem with IRRs / discount rates in isolation (2) As drivers of investment valuation, cash flow assumptions and discount rate are equally important ▲ ‘Optimisation’ of cash flows can appear to materially increase the value of an investment Cashflow optimisation Refinance 1,500 £1.5m Tax1 1,350
Slide 51: Only the discount rate measures risk in a valuation
Only the discount rate measures risk in a valuation Discount rates should reflect the value / risk inherent in cash flows ▲ Valuation B logically has less probability than Valuation A of delivering an 8% return ▲ Comparing in each scenario the sensitivity of returns to the same out-turn cash flows:
Slide 52: Comparing sectors – toll roads vs availability projects
Comparing sectors – toll roads vs availability projects Cash flows that look different can justifiably be valued using the same discount rate ▲ Equity cash flow profiles can differ significantly between sectors: 500 Availability infrastructure vs. demand infrastructure 400 Equity Cashflow 300 200 10
Slide 53: Finding Value in the Current Market
Value Accretive Investment Finding Value in the Current Market M80 Motorway
Slide 54: Global PPP deal flow
Global PPP deal flow Supply of projects has broadly recovered from the financial crisis – but geographic mix changing ▲ The UK market for greenfield projects has declined, leading to a reduction in secondary market supply ▲ Markets outside Europe are significant but equity opportunity reduced due to
Slide 55: Demand for infrastructure investments
Demand for infrastructure investments Infrastructure fundraising shows strong investor demand – running ahead of supply of opportunities ▲ Infrastructure asset class has witnessed huge growth in allocations by institutional investors since HICL’s IPO: over $290BN of unlisted equity has been commit
Slide 56: Asset pricing
Asset pricing Responding as would be expected to such an imbalance of supply and demand ▲ Overhang of equity producing ongoing contraction in discount rates / equity IRRs ▲ Increased competition in all areas of the market – including the sectors where HICL is active 18% 16% 14% 12% Investment IRR 10
Slide 57: HICL near term deal flow and valuation
HICL near term deal flow and valuation The macro-trends are reflected in where HICL is finding opportunities – and in asset valuations ▲ Deal flow (no. assets) evaluated by InfraRed on behalf of HICL is increasingly geographically diverse: 2015 2014 UK UK Australia Belgium Australia Canada France Fr
Slide 58: Finding value accretive investment
Finding value accretive investment However, it is still possible to find pockets of value ▲ HICL continues to source from open market auctions, but these supply a smaller proportion of assets (by value): Last 5 years Last 24 months Open market auction Off-market / limited competition Incremental / m
Slide 59: Levels of market activity in key geographies (1)
Levels of market activity in key geographies (1) Potential deal flow in select markets covered by InfraRed’s global infrastructure investment team – not HICL specific PPP Trans- Toll Sectors mission roads Greenfield Secondary UK ▲▲ ▲▲▲▲ ▲▲▲ ▲ Belgium ▲▲ ▲▲ ▲ ▲ France ▲▲ ▲▲▲ ▲ ▲▲▲ Germany ▲▲▲▲ ▲ ▲ ▲▲
Slide 60: Levels of market activity in key geographies (2)
Levels of market activity in key geographies (2) Potential deal flow in select markets covered by InfraRed’s global infrastructure investment team – not HICL specific PPP Trans- Toll Sectors Greenfield Secondary mission roads Canada ▲▲▲ ▲▲▲▲ ▲▲ ▲ USA ▲▲ ▲▲ ▲▲ ▲▲▲ PPP Trans- Toll Sectors Greenfield S
Slide 61: Summary
Summary Delivering value requires a competitive edge, experience and discipline ▲ The size of HICL’s portfolio gives it distinct advantages; for example through economies of scale ▲ InfraRed’s experienced asset and portfolio management team converts this inherent advantage into real value ▲ In combi
Slide 62: Concluding Remarks
Concluding Remarks Helicopter Training Facility
Slide 63: Concluding remarks
Concluding remarks Insight into the detailed management of the portfolio and approach to sourcing further investments ▲ Ten years successful investment history ▲ Projects are contractually structured, with long term relationships and an optimised allocation of risks between the parties Value Prese
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