As always, when we report on Infratil’s performance we look through two lenses; one focused on operations and strategy and the other on capital values, investment and shareholder returns.
Operationally, FY2018 was highly successful. Trustpower produced an exceptional result care of some unusual weather and their capable management of the resulting opportunity. Wellington Airport broke through the six million passenger mark and is knocking on the door of $100 million EBITDAF. Canberra Data Centres confirmed a relationship with Microsoft Azure to host their cloud services and produced a 30% uplift in its earnings run-rate. Perth Energy completed a major restructure and by the end of the period was operating profitably. From a standing start Longroad Energy is making excellent progress building a renewable generation and servicing business. NZ Bus produced credible earnings as it undertook the difficult task of reducing its scale to efficiently deliver the smaller number of routes it is now contracted to provide.
Of course there were disappointments. NZ Bus was not successful in a number of the re-contracting rounds that occurred in Auckland and Wellington. Tilt Renewables' generation and hence earnings were reduced by unusually calm weather in Australia and New Zealand. RetireAustralia experienced slower unit resales and flat unit values (both being industry-wide factors) alongside a modest commissioning of new accommodation as it reconfigures its development activity to incorporate more aged-care.
Infratil maintained a comfortable buffer of funds on deposit during the year. Infratil is in good shape with regards to access to capital. Over the year two Infrastructure Bonds matured and were refinanced. The average interest rate on the relevant debt fell from 8.3% per annum to 5.9% per annum an annual interest saving of $3.7 million.
The annual capital outlay of $325.9 million was satisfactory, but a little less than hoped for at the start of the period. A couple of investment plans are taking longer than expected to execute. Nevertheless, as the discussion and images in this annual report attest, Infratil’s businesses have good momentum and are actively growing their physical infrastructure.
Tilt Renewables A$105 million 54MW Salt Creek wind farm in Victoria is on track to be commissioned in July 2018. Tilt Renewables is “shovel ready” to build a 300MW wind farm at nearby Dundonnell and has progressed analysis, consents and other preparatory work on a further 2,000MW of wind, 920MW of solar and 320MW of storage assets. Tilt Renewables has over $1 billion of projects it could start construction on over the next year, subject to success in the Victorian State renewable electricity auction and Tilt Renewables’ability to manage future electricity price risks.
Longroad Energy has acquired 386MW of wind and 298MW of solar generation and established a services business which is managing these facilities and a further 552MW of generation for third parties. In addition to building a core business, Longroad Energy is progressing development projects, at least two of which are close to starting construction.
Wellington Airport is in the midst of building a 134 room hotel, a 1,000 berth car park and land-transport hub, expanding and refurbishing its terminals, and renewing its taxiway. These projects are part of a $300 million suite of initiatives which will have finished by the end of FY2019. Forecasts indicate that the Airport will then start on a $250 million programme of additional facility investments.
Canberra Data Centres’ new 21MW data centre at its Fyshwick campus is on track to be commissioned later this year. Once fully operational this new facility will have cost approximately A$150 million. Canberra Data Centres is already planning a new 50MW centre at its other campus at Hume.
At ANU Student Accommodation the Infratil joint venture's 3,750 student apartments were 100% utilised for the 2018 university year. A further 450 apartments are expected to be available for 2019.
RetireAustralia drew A$100 million of capital from its shareholders to enable it to increase its rate of development. While only a small number of new units were delivered in FY2018 and in the target for FY2019 is also modest, from that point on a substantial increase in available accommodation is anticipated.
NZ Bus having concluded the arduous process of re-contracting its routes, NZ Bus is now investing in the necessary fleet.
Trustpower’s $27.9 million of investment was allocated across various generation upgrades and other core systems.
The values of our businesses have also mainly experienced a positive period. It’s worth making specific note of Canberra Data Centres (CDC). Infratil purchased 48% of CDC in mid 2016 for A$386 million. At that time CDC's EBITDAF run-rate was A$50 million per annum and its enterprise value was A$1,075 million. CDC now has an EBITDAF run-rate of A$69 million which is forecast to be A$82 million within a year. Market comparables suggest that multiples have further strengthened, however just using the acquisition valuation multiple gives a current value for Infratil’s holding of A$540 million.
Our objective is to provide Infratil’s shareholders with good risk-adjusted returns. Primarily we seek to achieve this by making good investments which fit within our scope, and by ensuring that our businesses and risks are well managed.
We also have to ensure that the market recognises the value that has been created. This is more than just providing lots of information. We acknowledge that our portfolio is relatively complex given the number of sectors and jurisdictions within which we operate. Strategically we are proposing the following actions to improve the visibility of returns and valuation of our portfolio:
We are to simplify our portfolio of businesses. By reducing the number, we hope that shareholders will be able to focus on the more material platforms.
We will continue to provide useful asset-level information on our businesses and our objectives.
To the extent possible we will provide guidance as to future returns and goals at both the asset and portfolio levels.
These may sound obvious, but each reflects trade-offs, for instance owning fewer businesses means owning fewer growth options. We believe the share market is not fully, or even reasonably, valuing Infratil and we intend to be more proactive to improve this situation.
Dividends for FY2018 amounted to 16.75 cents per share. Since FY2011 full-year dividends have risen from 6.25cps. It is anticipated that the dividend will continue to increase.
The final dividend of 10.75 cps fully imputed will be paid on 18 June.
With a growing share of Infratil’s earnings coming from outside of New Zealand the availability of imputation credits is constrained which means that it is unlikely that the dividend will continue to be fully imputed. Our three year ahead forecast indicates that over that period imputation credits may not cover annual dividends above 10 cps.
Guidance for Underlying EBITDAF in the year to 31 March 2019 is for between $500 million and $540 million ($525.8 million this year). The guidance range is based on no material acquisitions or divestments, and on normal wind and hydro generation. In mitigation of a flat guidance relative to FY2018, it should be noted that FY2019’s range includes an assumption that hydro electricity generation is $25 million lower than occurred in FY2018. Hydro generation levels were unusually elevated in the year just concluded. Across the remainder of the business earnings growth is anticipated.
Our goals for our shareholders are to preserve their capital, to provide a good income, and to deliver capital growth. We are confident that we can deliver. This is not an era of certainties, but Infratil has good access to capital and a portfolio of strong and resilient businesses.