International Public Partnerships holdings continue well operationally and financially but lower inflation will negatively impact NAV

International Public Partnerships (INPP) has provided the market with an update on its performance so far this year. It says that its portfolio of over 140 projects and businesses has continued to perform well, both operationally and financially, during the period. Its portfolio continues to deliver essential services to stakeholders, maintaining high levels of asset availability. Projects under construction continue to progress well, with Tideway notably completing major construction works during the period; investments totalling c.£83m have been made since 1 January 2024, including in the Offshore Transmission (OFTO), social infrastructure and digital sectors (these investments are in line with previously published investment commitments and were funded from cash generated through the company’s recent realisations totalling c.£20m). It says that, throughout the period, its board has continued to review progress against its strategy for reducing its share price discount, and to determine strategic priorities for the management of its portfolio. However, as noted below, rising inflation is expected to have a negative impact on the NAV, although no indication as to the scale of this has been provided at this stage.

Dividend targets reaffirmed

INPP has reaffirmed its annual dividend growth targets for 2024 and 2025, with a 3.0% increase to 8.37 pence per share for 2024 and a further 2.5% increase to 8.58 pence per share for 2025. INPP says that this reflects its ambitions to sustainably grow dividends over the long term, whilst providing full dividend cash coverage from net operating cash flow before capital activity. The second and final dividend for the 2023 financial year was paid on 13 June 2024 so that the total dividend paid during 2023 was in line with previously published growth forecasts of 5.0%. INPP says that strong inflation-linkage of 0.7%2 has also been maintained, generating long-term real rates of shareholder returns.

Capital allocation

INPP says that it continues to take proactive steps to reduce the discount to NAV but is mindful of being responsible in its capital allocation. Cash drawings under its corporate debt facility (CDF) remain at nil with £19.2m utilised via letters of credit. Through its £30m share buyback programme launched in January 2024, INPP has, to date, bought back c.£13m of shares.

Financial performance year-to-date – inflation has fallen faster than expected

As at 31 December 2023, INPP’s NAV per share was 152.6 pence, as published with INPP’s full-year results on 28 March 2024. INPP’s investment portfolio valuation is determined semi-annually after advice from the investment adviser and is reviewed by INPP’s auditors. INPP says that, as with the wider investment company peer group, the company’s NAV per share is subject to changes in the external macroeconomic environment, including inflation rates, government bond yields and foreign exchange rates. Taken together, and other things being equal, these factors are currently expected to have a modest negative impact on its last published NAV. It lists the following factors:

• Inflation rates have fallen faster in the majority of the jurisdictions the company is invested in over the first half of the year, compared to previously published forecasts. Given the portfolio’s positive inflation linkage, a reduction in forecast inflation rates (other things being equal) will have a negative impact on the company’s NAV.
• Yields on the government bonds issued by the countries in which the company is invested are, on average, broadly in line with the levels seen at 31 December 2023. The discount rates that will be adopted as part of the 30 June 2024 valuation will be determined by taking into account, among other things, the underlying government bond yields, operational performance of the investments and prevailing market conditions.
• Since 31 December 2023, the company has observed a strengthening of Sterling against the majority of the currencies it is exposed to, including the Australian Dollar, Canadian Dollar, Danish Krone, and Euro, with the only exception being the US Dollar. In isolation, this would have a minor negative impact on the company’s NAV.

Portfolio developments

Since 1 January 2024, the company has made investments totalling c.£83m. these are:

• In February 2024, the company reached financial close on its eleventh OFTO, Moray East OFTO, which connects the onshore electricity grid to the Moray East wind farm off the coast of Scotland. The Moray East OFTO has the capacity to transmit renewable electricity to power the equivalent of c.1.0m homes, increasing the total number of homes capable of being powered  across the company’s OFTO portfolio to c.3.7m homes.
• Other investments include funding into two long-standing commitments to Flinders University Health and Medical Research Building and Gold Coast Light Rail – Stage 3 projects, which continue to be supported by letters of credit issued under the company’s CDF. These investments are expected to be funded between 2024 and 2025.
• In addition, the previously announced c.£13m further investment into toob, the digital fibre investment, has commenced and is expected to be fully deployed by 2025.

INPP says that, at the time of writing, it has remaining commitments totalling c.£20.9m across the transport (Gold Coast Light Rail – Stage 3), education (Flinders University Health and Medical Research Building) and digital (toob) sectors.

Tackling the discount

INPP says that, together with the majority of its investment company peers, its share price has been trading at a discount to its NAV since Q4 2022 and continues to be impacted by the sustained higher interest rate environment. Reflecting this, its board and investment adviser continue to believe the share price materially undervalues the company and have previously committed to take a number of actions to optimise the portfolio and reallocate capital to improve shareholder returns. INPP says that good progress has been made against these objectives to date, having fully repaid the CDF, increasing the dividend for 2023 and dividend target for 2024, commencing a share buyback programme, revising the target returns and recycling capital. In addition, INPP is actively pursuing further divestments and expects to be in a position to provide the market with further updates on or before the announcement of its 2024 interim results (expected in September 2024). At that time, it also expects to provide guidance around other capital allocation considerations, including pipeline opportunities and enhancements to the share buyback programme.

The board says that it intends for the following actions to guide its decision-making process while the share price discount to NAV persists:

• Continued limited use of the company’s CDF;
• Continuation of a programme of divestments to both demonstrate value and reallocate capital;
• The utilisation of any divestment proceeds towards both, (i) increasing the share buyback programme, and (ii) subject to the economics being more attractive over the medium to long-term relative to the opportunity to engage in a share buyback, making new, accretive investments.

Other shareholder initiatives

INPP held a Capital Markets Day in February 2024 for sell-side analysts and institutional investors (more information and materials are available on its website) and, in March 2024, INPP published its third Sustainability Report alongside its Annual Report. Following ongoing engagements with the company’s investors, a new set of ESG Key Performance Indicators (‘KPIs’) have been developed across the portfolio. In addition, the report provides enhanced ESG disclosures that will support shareholders in meeting their obligations under the EU Sustainable Finance Disclosure Regulation (SFDR) and the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).

Outlook

INPP’s board says that, while the company, and its broader investment company peers, continue to experience challenging market conditions, the continued strength, long-term nature and inflation-linkage of the portfolio’s projected cash receipts together provide it and the investment adviser with confidence that INPP will continue to meet its performance objectives. In particular, the board reminds investors that the implied projected net returns are in excess of 9% and that the projected cash receipts from the company’s portfolio are such that even if no further investments are made, the company should be able to continue to meet its existing progressive dividend policy for at least the next 20 years. INPP has reiterated its intention to take proactive steps to address the discount to NAV that its share price is currently trading and, through a prudent approach to capital allocation, is aiming to create long-term shareholder value. It adds that governments across the jurisdictions in which INPP invests have pressing infrastructure renewal and expansion requirements but continue to be fiscally constrained. The opportunity for the company to assist in the development and funding of these infrastructure requirements provides the board with optimism around prospects for growth in the longer-term.