2016 Annual Report Highlights

Investment Activity

Over the 22 years to 31 March 2016 Infratil's cumulative compound return to shareholders was 17.95% per annum.

Put another way, since its listing Infratil’s total value creation for shareholders amounted to $2,492 million.

That aggregates the $1,844 million 31 March 2016 market value of Infratil’s equity and the $1,001 million total value of dividends paid over the full period, less the $353 million of equity capital shareholders have provided the company.

This performance has been driven by the successful investments made by Infratil. Ideally they are very long-term and are in businesses that can generate compound returns by investing in their own activities. For instance, by 2020 (on conclusion of the projects now underway) Wellington Airport will have invested almost $700 million in its own activities since Infratil became the majority shareholder. That shareholding cost $98 million, so for each $1 of acquisition cost a further $7 will have been invested growing the value of the Airport (NB. Infratil owns 66% of Wellington Airport so in effect $5 of each $7 invested was Infratil’s).

As shown in the table copied below, over 80% by value of Infratil’s investments over the last five years involved growing the value of existing businesses, 20% was for the acquisition of new businesses. The distinction matters. Although Infratil can position to make acquisitions by having capital available, opportunities to buy shares, such as in RetireAustralia and Metlifecare ($369.2 million) cannot be planned as they arise due to considerations intrinsic to the vendors.

Compare this with the internal investment programmes of Trustpower, NZBus, Wellington Airport and now RetireAustralia. In each case the relevant company can systematically plan and manage their expansions/upgrades and be very fully informed about their prospects, risks and alternatives. 

 

Investment Outlays

Year Ended 31 March

($Millions)

    2016

2015

2014

2013

2012

5 years

Trustpower

$119.3 

$157.4 

$349.7 

$214.1 

$48.5 

$889.1 

Wellington Airport

$56.7 

$21.9 

$20.3 

$12.0 

$22.2 

$133.1 

NZ Bus

 $11.2

 $15.3

 $68.1

$56.7 

$63.7 

$215.0 

Perth Energy

 $0.6

$0.1 

$0.1 

$0.7 

$0.8 

$2.3 

Z Energy

-

-

-

$70.7

$74.0

$144.7

Metlifecare 

 $0.6

$1.6 

$147.9 

$150.1 

RetireAustralia1

 $27.8

$219.1 

$246.9 

Infratil Energy Australia

-

$16.2

$22.0

$27.0

$21.3

$86.5

ASIP

 $0.8

$32.0 

$32.9 

Parent/Other

$3.8

$1.7

$8.0

$29.8

$15.5

$58.8

Total

$220.9 

$465.4 

$616.1 

$411.0 

$246.0 

$1,959.4 

1. 50% of RetireAustralia’s capital expenditure is included in the 2016 figures. 

Over the last year Infratil found itself in an unusual situation care of the sale from Lumo, Z Energy and iSite. It has the capacity to deploy up to $1 billion while still complying with target credit parameters and being able to sustain the medium term goal of lifting dividends to shareholders.

This has naturally given rise to “use it or lose it” queries. There is no doubt that if Infratil doesn’t deploy the funds to increase shareholder returns, it should return the capital as opposed to merely having it on deposit with a bank earning 2% per annum. But there are two strong reasons why the directors have held off doing so.

One reason reflects market uncertainty. “In the last few years, the global economy has evolved in ways once deemed unthinkable. It is a phenomenon that... will intensify in the period ahead.” to quote Mohamed El-Erian (chief economic adviser of global investment firm Allianz and previously CEO of its bond management subsidiary PIMCO). Uncertainty makes it prudent to be well capitalised, and it increases the prospect of good investment opportunities arising from others being obliged to realise assets.

The second reason for retaining capital is the long lead-times of most of Infratil’s internal investments. Building a land-transport hub and a hotel at Wellington Airport or a major wind farm in Australia can take over five years from inception to commissioning. A material part of the $1 billion of available capital is earmarked for internal projects that just take a long time to execute.

Three recent investment initiatives are summarised below to illustrate Infratil’s approach, thinking and the influence of circumstances.

Pacific Hydro (what could have been)

Last year Australian superannuation funds manager IFM sold Pacific Hydro to SPIC which is one of the “big five” Chinese electricity companies. Pacific Hydro has renewable generation and development projects in Chile, Australia and Brazil and annual EBITDAF of about A$175 million. SPIC’s acquisition price reportedly valued Pacific Hydro at A$3 billion.

Infratil made bids for all of Pacific Hydro as well as for its Australian operations. The sector is well understood by Infratil’s management and Pacific Hydro’s complex operational and financial arrangements were felt likely to deter many bidders. Infratil’s $5.3 million of bid costs is testament to the thoroughness of the information gathering exercise.

In the event SPIC’s bid must have valued Pacific Hydro at more than the “sum of its parts” and more than any other 100% bid. Probably because SPIC has lower return targets and/or expects to capture benefits from the development pipeline not available to others.

Infratil cannot apologise for targeting a relatively high risk-adjusted return on its investments. That is consistent with the expectations of Infratil’s shareholders. It is also consistent with the returns generated by other recent comparable investments. For instance in 2014 Trustpower acquired renewable generation from the state of NSW for A$72.2 million which had EBITDAF of A$8.5 million. And the Snowtown II wind farm cost about A$500 million and is delivering EBITDAF of about A$70 million.

Pacific Hydro’s renewable generation projects and expertise would have been a good fit with Infratil. But Infratil’s bid price also reflected return targets and a view about the next-best alternative investment. While the process was expensive, a lot of information and understanding has been built up which should be of benefit in making future renewable-generation investments.

Enivision Ventures Fund (change before you have to)

Since the late 1990s Infratil has made a number of small investments in technology activities which were relevant to Infratil’s core businesses. In net terms the investments absorbed a small amount of capital, a reasonable amount of management time and have been interesting rather than of great educational benefit.

Last year Infratil committed US$25 million to an Envision “infra-tech” fund motivated by the same factor which drove the earlier investments; to get exposure to technology businesses which could have a material impact on Infratil’s activities. However this time, rather than Infratil’s management being absorbed into hands-on roles those will be undertaken by Envision’s management.

Technology is changing Infratil’s activities in many ways, small and large. Paying a bus fare, was with cash and cardboard tickets, is now with stored value cards and cell phones and will soon be pay-wave. Buses were diesel and trolley-electric and will soon be battery-electric. More efficient passenger aircraft are creating viable long-haul routes for smaller markets and smaller airports. Generating electricity is getting cheaper and cleaner and charging for electricity is shifting from a fixed cents/unit price to prices that reflect generator and line costs. Someone immobilised in their home can have immediate communication with remote clinicians.

Envision will augment our direct infra-tech activities in Australasia and help Infratil separate science fiction from science fact and to get ready for change before it is forced to.

Trustpower & “NewCo”

Trustpower has been highly successful in developing generation capacity in Australia. Over the last decade it invested $819 million into Australian generation which last year contributed EBITDAF of $105 million. However it is unclear if the share market value of Trustpower fully reflects this value creation. Trustpower’s share market value appears to be set mainly by reference to its New Zealand generator-retailer peers.

With very substantial additional investment expected to occur in Australia this created a conundrum. How to keep investing to create value while also getting that value reflected in the share price? The answer is to separate Trustpower into two companies, one of which will focus on Australian renewable generation projects.

It’s an illustration of the complex elements that go into making good investments, one of which is to ensure that the value created is understood and recognised by the market so it benefits the current owners. 

2016 Annual Report
2016 Annual Report
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