Welcome to HICL's results presentation for the year to the 31st of March 2022. Online participants will be in listen-only mode throughout, and we look forward to meeting you on the roadshow. Questions will be taken from the room at the end of the presentation. Today, you'll hear from Edward Hunt, head of Core Income Funds at InfraRed, who leads the team responsible for HICL. Helen Price, CFO, and Ross Gurney- Read from the HICL Fund Management team. I'll now pass you over to Edward Hunt to begin.
Thank you, Kirsty, and good morning. A warm welcome to those in the room today and also those joining us over the webcast. On screen, slide three, you'll see today's agenda. The presentation should take around 30 minutes. Very happy to take questions at the end. I'm gonna start with an overview of the key highlights. Helen's then going to present the financial result with some additional analysis on the impact of inflation. Ross is going to talk about portfolio performance and an update on our key segments, and then I'll come back and talk about investment activity, the market, and the outlook for the company. With that as a plan, turning now to the key messages from this set of results on slide five.
I'm pleased to report that HICL achieved a strong operational and financial result for the year, with NAV growth of GBP 0.108 to GBP 1.631 per share. These results have been underpinned by the considered construction of HICL's portfolio. On the one hand, deliberately positioned to offer strong inflation protection and lower correlation to wider equity markets, and on the other, actively managed with over GBP 230 million of M&A in the period, which has significantly contributed to our performance. Dividend guidance of GBP 0.0825 per share has been reconfirmed for the year to March 2023. The board is also issuing new guidance of GBP 0.0825 for the year to March 2024. HICL continued its sustainability leadership in the year, both in disclosure and action.
Alongside the annual report today, the company's publishing a standalone sustainability report for 2022. It's a standalone document on the website. It's about 30 pages. Ross will talk to some of the key highlights in a little bit. InfraRed's active approach to management extends beyond the existing portfolio and also to the strong pipeline of opportunities in front of the company. The market opportunity is significant, and InfraRed's capabilities ensure that we access that pipeline and execute to make accretive acquisitions across HICL's key metrics. HICL has delivered a 9% per annum total shareholder return on a NAV basis since IPO. That spans two recessions, Brexit, COVID, and now of course a heightened geopolitical and macroeconomic conditions. HICL's strong inflation correlation, low beta, and predictable yield ensures that HICL remains a core holding for all seasons.
This story is captured on the next slide six. Just pulling out a few additional points here. A strong shareholder return of 12.8%. That's dividends plus NAV growth in the period. Improved cash cover of 1.05 times. That's supporting the extension of HICL's dividend guidance, and that remains the highest cash dividend in the listed core infrastructure peer group. A low beta of 0.32. That's demonstrating that uncorrelated diversifying effect that HICL brings to investor portfolios. That investment proposition is set out in full on the next slide seven. HICL's investment proposition is to deliver sustainable income from a diversified portfolio of core infrastructure assets.
The company offers stable, long-term, real returns from core infrastructure assets that are vital to communities and diversified across sectors, revenue types, geographies, put together to deliver that robust set of cash flows. This deliberate portfolio construction allows us to deliver those attributes on the left-hand side of this slide, but only with the tacit endorsement of the 20 million plus individuals that interact with HICL's assets. HICL is strongly positioned to deliver the S in ESG and remains a core holding for sustainability-minded investors. InfraRed is a key component of that story. A specialist in, investment manager to the company, active management DNA, over 25 years of experience, and a global footprint and workforce to match. Slide eight, we've set out HICL's vision, a familiar message. HICL seeks to enrich lives through infrastructure by developing strong social foundations, connecting communities, and supporting sustainable modern economies.
This slide sets that out, both the physical assets that we see in our communities around us and also the link to the portfolio, which you can see in the percentages on the right of the slide. We'll also talk a little bit later about how that connects with and guides the company's acquisition strategy. For now, over to Helen to talk through the financial result.
Thanks very much, Ed, and good morning, everybody. Let's start with the NAV. Here you can see the strong increase in NAV per share to 163.1p. Portfolio performance, being the return on the investment portfolio, contributed 13.9p, and the weakening of sterling, another 0.2p. I've split out the performance between value preservation, where you see the unwinding of the discount rate, and value enhancements. The value enhancements of 4.1p are from the impact of actual inflation and the sale of Queen Alexandra Hospital, QAH. This was partially offset by expenses and tax of 1.9p and dividends of 8.25p.
Overall, this meant that HICL generated a very healthy total shareholder return of 12.8%, as Ed mentioned earlier. Turning now to the income statement in more detail. Here on slide 11, you can see the output of the investment portfolio performance. Total income increased by GBP 217 million to GBP 406 million. This significant increase is largely due to the portfolio performance I've just mentioned, as well as higher forecast inflation and the 0.2% reduction in the weighted average discount rate to 6.6% that we recognized in September. We held expenses largely flat at GBP 37 million, so the reduction in the ongoing charges percentage to 1.06% was driven by the increase in the investment portfolio in the year.
The investment portfolio also drove the balance sheet movement, which I'll cover on the next slide. We ended the year with net debt of GBP 46 million and GBP 294 million of available liquidity. On the 1st of April, we announced the signing of a new GBP 400 million facility out to June 2024, which means we're well-funded for our commitments as well as our significant investment pipeline. As I said earlier, the investment portfolio valuation on the next slide is the principal driver of performance. Firstly, the valuation methodology is unchanged. As a reminder, we show the investment portfolio on a gross director's valuation basis, and this includes the commitments we've made at the 31st of March.
We also show the valuation net of commitments, and we show this in dark purple, which is the portfolio valuation under the investment basis. The chart sets out the change in the valuation over the year, and we start with 2.9 billion at the 31 March 2021. HICL had a good year for acquisitions. We invested GBP 56 million in two tranches of the Road Management Group, and we invested GBP 16 million in two incremental investments in Bradford 1 and Bradford 2 schools. In addition, we committed GBP 28 million into one of our UK healthcare assets and GBP 10 million into the B247 road in Germany, which we announced in May, taking us to the total of GBP 110 million of acquisitions you can see on this slide.
On the disposal side, we sold one investment, Health & Safety Executive HQ, which we told you about in November, and we also returned one very small PPP asset back to its client. We generated a small profit versus original cost of GBP 5 million on these two assets. Note that QAH remains in the portfolio valuation as its sale wasn't complete at the end of the year. After cash distributions, the net portfolio value was GBP 2.8 billion. I show this as the rebased valuation because it's the basis for determining the portfolio's return.
The portfolio return is GBP 270 million or 9.6%, and this is ahead of the 6.8% discount rate at March 2021 because of the following, higher than expected inflation, the sale of QAH, and these were partially offset by increased costs from renewing contracts such as MSA and Lifecycle and remediating certain facility issues across our PPP portfolio. In September 2021, the weighted average discount rate for the portfolio reduced from 6.8% to 6.6%, and this added GBP 60 million to the valuation this year. Changes in economic assumptions generated GBP 72 million. Most of this relates to changes in inflation assumptions for the next two years. In line with market forecasts, inflation is expected to remain high for the next 12 months before trending back towards our long-term forecast.
Our assumptions are included in the appendix, and we have some new sensitivities to help you model the impact of short-term moves on our portfolio. Overall, the valuation of the investment portfolio increased to GBP 3.2 billion at the 31st of March, and we increased our commitments from GBP 74 million to GBP 94 million. Now on the next slide, you see how we set the reference discount rates for the portfolio. First of all, institutional investors continue to see core infrastructure as an important and scarce source of stable income. There were several relevant transactions this year, which include the John Laing transaction with KKR and Equitix, our own sales of QAH and Health & Safety Executive HQ, the acquisition in January 2022 of incremental stakes in the Semperian PPP Fund, and several water companies, including Thames Water, Anglian Water, and Bristol Water.
From these transactions, it's clear that pricing remains competitive. This chart shows how we view the discount rate. We look at the implied risk premium over long-dated government bond yields. The chart shows the discount rate since IPO in 2006. Government bond yields are purple, and the risk premium is gray. You can see that the risk premium provides a degree of protection against movements in interest rates, as historically, they haven't moved in step. Coming to the rate that we've chosen at March 31, 2022. As you would expect, rising risk-free rates in all jurisdictions, together with ongoing competition for assets, reduced the implied risk premium to 4.8%. However, we think that this risk premium continues to offer a good buffer against rising interest rates as well as attractive risk-adjusted returns.
You'll be familiar with this slide too. What I'm showing here are the key sensitivities around the valuation assumptions expressed in the NAV per share impact. These sensitivities are in line with those previously, with discount rate and inflation being the most material for the company. Currently, it's inflation that has the key sensitivity for the company. In light of this, here is a new slide to show the portfolio's inflation sensitivity over 1, 3, and 5 years in both NAV per share and cash flow terms. On the left, you can see the impact on NAV of a 3% increase in inflation over and above our current forecast assumptions. This means that if UK RPI is 9% over the next year rather than our forecast 6%, HICL's NAV should increase by 3.6p.
As a reminder, our short-term inflation assumptions are on page 42 of the appendix. The impact of a short-term increase in inflation on cash receipts is on the chart on the right. You'll see in this that the impact on cash is muted in the first three years before increasing. Why is this? It's because the underlying contracts dictate how and when inflation feeds into cash revenues. It's not immediate, and it depends on the asset type. We've provided more detail in a case study in our annual report on this. From 2026, you see a marked increase in forecast cash flows. This is principally due to the assumption that Affinity Water will start to distribute. From 2040, the cash distributions then return to a more normalized position as the PPP assets are handed back.
Before we move on to portfolio performance, here's the familiar snapshot of the portfolio and its cash flows. This slide looks at the forecast cash flow over the next 40 years. This underpins HICL's dividend and provides confidence for the board to reiterate its dividend guidance for the 2023 and 2024 year ends. It's really important for the board to rebuild HICL's dividend cover and have a dividend that can be supported by future earnings. These vertical bars show the forecast cash receipts, and you can see the steady increase in cash flows for the next few years, which will help us rebuild our dividend cover. The gray line on the chart shows the net present value of these cash flows, giving a projection of how the portfolio value will change, assuming no acquisitions, disposals, or changes in valuation assumptions.
Our role is clearly to enhance the weighted average asset life of the portfolio through acquisitions, for example, and improve the cash flow, earnings cover, and therefore the dividend. I'll now hand you over to Ross, who will take you through portfolio performance.
Thank you, Helen, and good morning, everyone. I'll start by drawing your attention to slide 18, which provides a snapshot of HICL's diversified portfolio. This diversification is one of the main attractions of HICL. It drives performance, mitigates risk, and is a key priority for InfraRed. The recently announced fiber broadband investment in ADATIM, which Ed will talk you through a bit later, is expected to represent around 2% of the portfolio by value and will further improve this diversification. You'll also notice the weighted average asset life. Sitting at just under 30 years, this is what underpins the long-term cash flows Helen was mentioning just a moment ago. In the right-hand chart, you can see how HICL's three market segments are represented across the top 10 assets.
This year, we've provided enhanced disclosure on the performance of each of these assets, which can be found in section 2.6 of the annual report. For now, I'll go through the performance by segment, starting on page 19. PPPs, or public-private partnerships, represented two-thirds of the portfolio by value as at the end of March 2022. These assets benefit from long-term availability-based revenues, which tend to be contractually linked to inflation through an annual indexation mechanism. This has contributed to the good performance of this market segment over the year. HICL's PPP portfolio delivers essential services to communities, which reinforces the importance of InfraRed's stakeholder-led approach to asset management during the year. This occurred at the asset level, such as working with partners to manage facility condition, and at the industry level by taking a leadership position across key challenges for the sector.
As well as continuing to actively manage the assets themselves, InfraRed also focused on managing the composition of the PPP portfolio in order to drive value for shareholders. This was demonstrated through the opportunistic disposals of Health & Safety Executive HQ and Queen Alexandra Hospital, which together delivered a combined holding period return of around 10% per annum, as well as the incremental PPP investments made during the year, which were accretive to yield and returns. Drawing on InfraRed's experience and network, HICL also committed to the B247, a greenfield PPP road project in Germany, which completed after the year end. The investment was made in partnership with VINCI, and this ongoing relationship will improve HICL's access to further greenfield road projects in the region, which in turn will help to further extend the average asset life of the portfolio.
I'll now move on to talk about HICL's demand-based assets on slide 20. Overall, the performance of this segment was in line with our expectations over the year and was characterized by the continued recovery of HICL's three largest demand-based assets from the impacts of COVID-19. The A63 motorway in France performed robustly during the year. Traffic returned to pre-COVID levels in the summer of 2021 and has remained there since then. Looking forward, our traffic forecast is materially the same as it was in September 2019, demonstrating the asset's full recovery from COVID-19. It is also worth noting that tolls for all vehicle types are contractually linked to inflation. Traffic on the Northwest Parkway largely tracked HICL's valuation assumptions during the year, although road usage dipped slightly in the final quarter as a result of snowstorms in Colorado.
However, since the year-end, traffic has returned to our expected recovery trajectory, which assumes a return to pre-COVID traffic levels by June 2023. For some recent context, in the month of April 2022, traffic reached just over 90% of pre-COVID levels. The management team has the ability to increase tolls twice a year based on inflation, which protects real revenues in real terms. The performance of High Speed 1, which has been the asset most impacted by the pandemic, improved significantly in the period. The gradual easing of travel restrictions in 2021 led to a recovery in international train path bookings to just over 50% of pre-COVID levels before Christmas. Although restrictions were briefly reintroduced as a result of the Omicron variant, the impact on performance was immaterial in the context of our valuation assumption for the financial year.
International train paths are currently running at around 85% of pre-COVID levels, buoyed by strong demand for leisure travel on both sides of the channel. HICL's forecast continues to assume that Eurostar bookings will gradually return to pre-COVID levels by March 2025, underpinned by the strategic positioning of the asset as the green gateway to Europe. The increased press coverage of potential new entrants to the cross-channel rail market further endorses the inherent long-term attractiveness of High Speed One. Domestic services continue to be booked at below pre-COVID levels and are supported by the underpin from the UK Department for Transport, which guarantees the equivalent of 96% of pre-COVID revenues. Our forecast assumes that domestic services will return to pre-COVID levels by 2025 as passenger demand slowly recovers.
All track access revenues, including the domestic underpin, are contractually linked to RPI inflation for the remainder of the concession. Thanks to the efforts of the HS1 team and InfraRed's asset and stakeholder management approach, the company has navigated the pandemic without requiring any external funding, which is a significant achievement given the highly challenging operating conditions of the past two years. At HICL's interim results in November 2021, we flagged the initial acquisition of a 33% stake in RMG Roads. The company subsequently acquired a further tranche from KBR, and the two underlying road projects are performing well. The accretive nature of the transactions, combined with the benefits from increased governance rights, demonstrate the value of incremental acquisitions, which is a strategy we're open to exploring on other GDP-correlated assets in the portfolio on a case-by-case basis.
I'll now turn to the final market segment on page 21. HICL's regulated assets, comprising the investment in Affinity Water and the company's four offshore transmission assets, or OFTOs, account for 12% of the portfolio by value. All four OFTO investments continue to perform strongly. Over the entire year, the availability across all four assets was 100%, supporting UK energy security and enabling the transition to low-carbon electricity. All four OFTOs are held jointly with Diamond Transmission Corporation, and HICL has reignited the partnership to bid for the Hornsea II OFTO, with a final decision on preferred bidder expected by Ofgem in the coming months. The performance of Affinity Water was in line with expectations over the year, including, excluding the positive impact of actual inflation, which I'll come on to shortly.
The management team remained focused on driving operational performance, as demonstrated by the significant improvement in leakage reduction over the year. This focus on operational performance was recognized by Ofwat in its most recent service delivery report, with Affinity Water judged to have stepped up to the challenge set in the PR19 final determination. Looking ahead, the company's priorities are to deliver its AMP7 business plan and continue its preparations for the next price review period. The strategic contribution Affinity makes to HICL's portfolio has been made particularly evident in the year. It is HICL's largest asset, and it is also the asset with the highest inflation correlation, thanks to its regulated revenue, which is fixed by Ofwat in real terms, and a regulatory capital value, or RCV, which is indexed to RPI and CPI.
RCV growth underpins long-term growth in Affinity's cash flows, which in turn supports HICL's investment proposition far into the future. Affinity's RCV growth in the year ending 31 March 2022 was 13%, which is the highest of any water company in England, driven by the investment required for demographic change, but also to manage natural resources. Affinity's steadfast commitment to sustainability, demonstrated by initiatives such as Save Our Streams, is reflective of HICL's wider approach, which is set out in a bit more detail on the following page. Because HICL's infrastructure interacts with over 20 million people globally, the interests of our shareholders are tightly interwoven with the delivery of societal benefits for the communities served by our assets.
Over the year, the company has continued to progress its sustainability strategy, which draws on the inherent social good delivered by HICL's essential assets, as well as InfraRed's role in actively promoting positive outcomes across the portfolio. Alongside the company's annual results, I'm pleased to say that we've also published HICL's sustainability report today. This slide sets out a few key highlights, as well as a link to the standalone report, which can be found on the company's website. Given the amount of content in the report, I won't attempt to cover it all now, but for those investors who are dialed in, we would be very happy to discuss the report in detail with you and your ESG teams in follow-up meetings.
Throughout the report, you will see that our approach is reflected in HICL's vision of enriching lives through infrastructure by delivering strong social foundations, connecting communities, and supporting sustainable modern economies. With that in mind, I'd now like to hand back over to Ed, who's going to take you through an update on the market, our investment activity, and the outlook for the coming months.
Thanks, Ross. Let me do just that by taking you to slide 24, with our core infrastructure framework. You've seen this slide before, but it's important to revisit. HICL is a core infrastructure investor. It always has been a core infrastructure investor, and this slide sets out what that means. We're looking for essential real assets, delivering long-term resilient cash flows from a protected market position. That's another way of saying the lower end of the infrastructure risk spectrum. We use this framework to guide our approach to deal screening and due diligence, and we go into that in a bit more detail on the next slide 25. This sets out the transaction activity in the year. It provides a bit of insight on our coverage capability, how selective we are, how successful we are.
You can see here we looked at 32 new opportunities in the year. We took forward half of those to more detailed due diligence, and agreed 8 transactions in the financial year, including the two announced post year-end. A few observations I'd just add on this activity. Of those transactions we took forward, we concentrate on key differentiators. So that's mid-market assets, incremental acquisitions, relationship driven pipeline, and opportunities where InfraRed has a differentiated skill set. Secondly, we're seeing good coverage across geographies, a greater contribution in the period from InfraRed's overseas offices, which cover North America and Australia and New Zealand. Thirdly, there's also a mix of opportunities from those traditional infrastructure sectors, but also the more modern economy sectors.
Over the second half, in particular, we've seen a stronger contribution from this latter group, including fiber, towers, district utilities, electricity wires, higher quality opportunities, and in greater number than we've seen historically. One such example is ADATIM, a French fiber asset that we announced that we'd acquired last week. We've set out a case study on this on the next slide 26. ADATIM is a terrific example of a modern economy infrastructure asset that meets our strict core infrastructure criteria. InfraRed has been active in fiber since 2017. It's made two significant investments in the space on behalf of other InfraRed funds. Over the last two years, we've been targeting the French market, in particular, the French rural market, specifically for HICL.
France is a relatively mature market in terms of broadband and fiber broadband, and you can see that in rollout and take up. It's also supported by a strong national agenda, which includes the phase out of copper broadband by 2030. The attraction of the rural fiber market in France is quite clear. The regional networks are procured under concession frameworks with the local authorities. They're procured as effective regional monopolies. The holder of the asset offers wholesale network access to the internet service providers. Because of that market positioning, the pricing is overseen by the regulator. In this case, ADATIM holds two fiber concessions in Ardèche and Drôme in southeastern France. It's over 18,000 kilometers of fiber infrastructure when fully rolled out, and the local authority maintains responsibility for that rollout.
Co-shareholder Axione operates the network as it does for around 20% of the rural network in France. Importantly, ADATIM also fits squarely within HICL's vision, connecting underserved communities with essential fiber broadband, linking people to employment, to education, and to each other. Looking forward, slide 27 sets out the outlook more broadly. Notwithstanding the broader market volatility, conditions do remain very supportive for infrastructure investment. As I mentioned at the top, we're seeing significant opportunity to pursue accretive acquisitions for HICL, and that's right across the core infrastructure landscape. We've set this out on the slide in alignment with the company's vision. As you can see here, we have over half a billion pounds of equity and at an advanced stage that spans the breadth of our core infrastructure geographies, as well as our traditional sectors and those more modern economy sectors.
There's some commentary included on the slide here. As I've mentioned already, in this market, we're focused on running a different race. That is locating assets in less competitive situations by focusing on our key differentiators. Mid-market assets, avoiding the big auction processes, incremental transactions across each of our existing asset segments where there remains significant opportunity to do more. Relationship-driven pipeline. We've mentioned here two partnerships executed in the last six months, hopefully another one to come soon. Again, focusing on areas where InfraRed has a differentiated skill set, for example, greenfield assets like the B247. The 11 live opportunities that we flagged on a previous slide reflects this approach and also reflects InfraRed's capabilities as an international platform active across multiple investment strategies that brings with it the footprint, the network, the expertise to locate those situations where InfraRed has an angle.
Finally, now on to slide 29. Just some brief concluding remarks. This is a strong financial and operational result for the company. The portfolio has performed well, supporting cash cover and the extension of the company's peer-leading dividend. Finally, we're optimistic and excited about the company's ability to grasp the significant opportunity in front of it, to make accretive acquisitions, and to grow its high-quality portfolio. We'll leave the presentation there. Thank you very much for your attention, and happy to take questions from the room.
Thanks. It's Alexander Wheeler, RBC. Just a couple of questions from me, please. Firstly, the GBP 510 million that you talk about, is that equivalent to the 11 live opportunities? I suppose it's just to make sure on that point. Then secondly, on that, within those opportunities, if you could give us a rough idea of the mix between new opportunities and incremental opportunities, that'd be good. Also just, if you can, just how lumpy that 510 is in terms of whether there's a, you know, chunkier investments in there or whether it is a case of sort of doing 510 divided by 11 to get you in a broad ballpark area. Sorry, that was a few questions, but meant to be one.
Secondly, just on the value accretive disposals that you've done in this period and whether that gives you any sort of incentive to look at the portfolio and see if there are any assets in there that other people might value more highly than yourselves. Thank you.
Sure. Thanks, Alex. Just in relation to the GBP 510, that doesn't include all of the 11 live opportunities. That includes opportunities that we're either exclusive preferred bidder or shortlisted in. So there's a batch of assets that sit behind that we're actively bidding, but not yet at that stage. In relation to how much is new acquisitions versus incrementals, all of that GBP 510 is new assets. In respect of how lumpy it is, yeah, I mean, we can give you. There's some decent sized assets in there. I'd say there's approximately 5 transaction opportunities within that GBP 510.
In respect to evaluation of the value accretive disposals, maybe I'll just give a little bit of intro and then I'll ask Helen to talk to it as well. Fundamentally, we're a buy-and-hold investor. We're looking at putting together a portfolio of assets that delivers reliable cash flow over the very long term. That's the starting point. We do look at disposals. I think over the 16 years since IPO, we've done around 16 disposals, so one a year. We've done a few this year, some larger than others. In terms of our process, we do tend to look and run the rule over the portfolio on a periodic basis, and it's a fairly dispassionate assessment of the contribution of assets to the overall portfolio.
We look at things across those key metrics, return, yield, inflation correlation, asset life, and see whether that money could be deployed more fruitfully into other assets. That's just sort of the general principle. Invariably, we've also managed to dispose of assets in an accretive way. We generally feel quite comfortable with the valuation of the portfolio and that you know, there's not necessarily large upside sitting in selling more assets. Maybe, Helen, you'd like to speak a bit more about the process we ran on QAH, for example.
Sure. We ran the QAH process in the last quarter of this year, and we had a number of different acquirers who were looking at the asset, and a relatively wide range in terms of pricing applied. When it comes to our current valuation, we took the relevant assumptions that were used as part of that transaction and applied them to our portfolio where it was appropriate to do so.
Thanks. It's Iain Scouller from Stifel. I've got three. Firstly, just on the availability payments, I mean, I guess there probably weren't too many public sector clients which a year ago were budgeting for an 11% increase in payments. Are you seeing any sort of pushback or any issues around this? The second one is, obviously availability payments going up, but, presumably the costs within the projects are going up as well, whether it be employee pay, maintenance costs, anything like that. So just wondering, just talk a bit about the mix. Then the third one is on HS1.
I mean, if the Department for Transport wanted to reduce the number of train slots, given the working from home, how much notice would they need to give you on that or give HS1 on that?
Thanks, Iain. Maybe I'll take the first one on availability payments, and then I'll ask Ross to talk about costs and-
Yeah
the High Speed 1
Yeah
situation. Yeah, you're right to point out the public sector budgets aren't necessarily moving up with inflation in the same way, but their availability payments are over time. It remains something that we're keeping an eye on. There's no evidence at the moment that that's a particular driver of public sector behavior around the assets. In relation to the cost framework, Ross?
Yeah, very happy to take that one, Ed. I think you're right to point out that obviously the costs associated with the PPP project are also often linked to inflation, so things like MSA costs. Obviously there's also financing costs in there. Depends, for instance, if the project has hedging in place or not. I think the important thing with PPPs, especially in the UK, is that when they were set up, effectively the revenue streams were contractually indexed such that actually the projects would have a positive correlation despite the indexation that's also there on the cost line. We do see the cost. This does flow through, but it still doesn't affect the fact that our projects are positively correlated to inflation. Then shall I just take the HS1?
Yeah.
Yeah. In terms of how the path booking works, generally it's almost half a year ahead, the operators book paths to the fixed working timetable in advance, effectively 26 weeks or so. Actually, if you look at what the domestic operator has been doing, it has been booking these paths, but actually they're currently running at below pre-COVID levels, as I mentioned. The Department for Transport is currently topping up that level of paths up to the 96% level of equivalent pre-COVID paths stipulated under the underpin contract. It would have to give a fair bit of notice, but the impact, if it was to further reduce paths from the level that we currently see, there would really be no impact given where train paths currently are.
Okay, thank you.
Hi, good morning. It's Nicolas Veyssière for BNP Paribas Exane. Thanks for the presentation. I have two questions on my side. First of all, on the dividend, the coverage ratio is back above one for the year. I was wondering, given the rise in inflation, that investors might want to be looking at some dividend growth. At one point, what level of coverage ratio would you feel comfortable to increase the DPS again? My second question is related to acquisitions. It was quite interesting last week to see your announcements on the fiber asset acquisition. Does that mean that you now feel comfortable to say that this asset class, and also maybe towers, are becoming core infrastructures?
If so, could we expect that it's gonna represent sizable chunk of the future pipeline given that there can be many opportunities from private infrastructure funds looking to exit these assets on the value add space? Thank you very much.
Thanks, Nicolas. Helen, do you wanna take dividend?
Great. We're very pleased with the improvement in the dividend coverage that we've seen in the year. It was 1.02 before the impact of profits against original cost. We don't have a guidance or a target, but we say that sort of around 1.1 is a level that we're trying to work towards. We are encouraged with the performance, but we think that there's still further to go. The other thing that the board looks at when it sets the dividend is the earnings trajectory of the company. For us, it's as important to make sure we have a dividend that is sustainable under a future earnings trajectory. Linking to your inflation point, inflation is clearly positive for the company.
It's much more positive from a return perspective, so if we make a change to our macroeconomic assumptions, for example, you see that immediately within the return. As I showed in the case study, but also the slide 15, the impact of inflation on cash receipts is muted in the first few years. That's because it compounds over time, and while the increases in income are there, it's not a step change. For us, it's about helping rebuild our dividend cover, help us to provide extra cash, for example, to recycle into the portfolio.
Thanks, Helen. On the acquisition side of things, so yeah, it's a good question. I think it was around two years ago now, we held a capital markets day, where I stood up and talked about the evolution that we expected to see in the core infrastructure pipeline over time. We pointed to the key macro trends that were driving the development of new infrastructure and where the CapEx was going in terms of new assets. There were two areas that we highlighted in particular. One was communications infrastructure, and the other was the energy transition.
In terms of communications infrastructure, we highlighted that we expected to see more and more projects in this space, particularly around fiber, but also, you know, just digitization trends and the demand for data more generally, but that these opportunities wouldn't manifest immediately as core infrastructure opportunities. There was still a de-risking process to take place over time, as these networks matured, as people got their head around them, and as you say, as they go through the value add funds to the core plus funds, to the core infrastructure funds. We've been very selective. We have quite a rigid core infrastructure framework in terms of how we run the rule over these types of opportunities that come up.
We targeted the French market in particular because it more obviously has those characteristics, which I mentioned in the presentation. What we're pleased to see is that the number of high-quality core infrastructure opportunities in areas like fiber and mobile towers, they're coming down the pipeline now, more frequently at a higher quality. We are seeing more and more pipeline in this space and looking forward to doing more transactions in the area. At the moment, we're roughly 2% of portfolio value, so we're not too worried about concentration in the space at the moment, but we do see plenty of opportunity for this percentage to increase.