The Q1 2021 release of the EDHECinfra indices incorporates the views and asset-level revenue forecasts of our team of financial analysts. This report updates the Q4 2020 report and is presented following the TICCS® taxonomy of infrastructure companies. Each quarter, the team reviews the revenue forecasts of 650 companies that are currently live in the EDHECinfra universe, based on the latest reports, historical data, sector knowledge and contributed data.
by Jack Lee and the team
1. Overview: further cash flow projection downgrades in the wake of the continued impact of Covid-19
Despite progress with development of and provision of Covid-19 vaccines, there is still little visibility of the evolution of lockdown restrictions in 2021 in most of the 25 countries in the EDHECinfra universe. On this basis, the expected impact on the future revenues of infrastructure companies remains depressed for the next 12-36 months. The UK is a particular point of focus, given the combined effect of the ‘tier-4’ lockdown and Brexit, with the latter taking effect on 1 January 2021.
That said, the majority of the forecasts we made in Q4 2020 remain applicable, with the exception of airports, road companies, the UK port companies and some rail companies.
As before, the most impacted segments are merchant (BR-20) and regulated (BR-30) companies. In the absence of long-term revenue contracts, these investments are susceptible to the impact of external events. By contrast, contracted business models (BR-10), have been far more insulated from the impact of Covid-19 on cash flows. Despite this, risk premia and discount rates have increased, impacting valuations of these firms too.
As of this quarter, companies in all geo-economic segments (TICCS Pillar 4) are included in our revision of the revenue forecast due to Covid-19, as the pandemic has spread.
In what follows, we consider the following industrial sectors experiencing the most material impact:
|TICCS® industrial superclasses most affected by Covid
||Power Generation x-Renewables
||Energy and Water Resources
2. IC10 Power Generation ex-Renewables
Q1 2021: International Energy Agency (IEA) expects global electricity consumption to increase by 3% in 2021. Whilst Europe’s electricity consumption is expected to grow at 2.3% in 2021, it remains 2% below pre-Covid consumption. This is partly as a result, from the recent restrictions on activity, implemented in the fourth quarter. Elsewhere, few of the other countries in the EDHECinfra universe have eased restrictions. Given our prior write-down in expectations for power revenue, we see no need to adjust the forecasts further.
3. IC40 Energy and Water Resources
Q1 2021: Forecasts in the current quarter for infrastructure assets under the IC40 sector remain unchanged and follow the company level forecast rates of Q4 of last year. We continue to hold a pessimistic outlook of a 3-5% revenue decline. However, the rates are significantly different for Merchant IC40 companies with revenues exposed to demand risk, where they are as substantial as a -30% decline. Longer term, we still maintain the view that the global economy is well-positioned for a future timeline that sees a gradual recovery to pre-COVID levels in 2022.
Our Q1 2021 revenue projections for IC40 companies are unchanged from our Q4 2020 assessment.
4. IC60 Transport
4.1 IC6010 Airport Companies
Q1 2021: The total of global passenger kilometres flown (RPKs) is expected to only grow 13% to an average of 38% of pre-Covid levels in 2021 (IATA, 2021). This is aligned with our revised expectations that most of our airport constituents will experience a slow recovery in 2021. Heathrow, a UK airport operator, forecasted that in 2021 that there would be a 54% reduction in terms of passengers when compared with 2019 (Heathrow, 2020). The drop in passenger flights has led airports to adjust their focus to the air freight sector and employ various cost-cutting measures. For example, Heathrow has repurposed operations, and scaled up the number of dedicated cargo flights. These measures provide some cushion to the impact of the pandemic resulting overall revenue drop.
We continue to expect a gradual recovery in travel demand in late 2021, with numbers returning to pre-Covid level in 2022. Authorities in the Asia-Pacific region are in favour of delaying the reopening of borders to at least 2022. According to Brendan Murphy, secretary of Australia’s Department of Health, the country is unlikely to completely open its borders in 2021 even if most of its population gets vaccinated this year as planned (BBC, 2021), and in the UK, travel corridors have all been suspended since early of the current year.
4.2 IC6030 Port Companies
Q1 2021: Port trading activities showed signs of a recovery in Q4 of last year, as can be seen by The United Nations Conference on Trade and Development (UNCTAD) revising its 2020 estimate to a fall of -5.6% from a previously much more pessimistic -9% (UNCTAD, 2020). This recovery is expected to continue in 2021. Consequently, summary, our projections for Port Companies remain the same, with the exception of those in the UK which face the additional challenge of Brexit.
The Brexit free-trade arrangement has added a layer of complexity for UK Port companies whose revenue streams are tied to EU trading partners. With additional paperwork and health certificates, the cost of moving goods has risen and delays at ports have increased substantially.
Added red tape now requires British exporters to register to pay VAT in EU nations, which has prompted many companies to reduce trade. In a survey conducted, 60% of the 444 respondents indicated that goods were reaching the UK more slowly than Europe, with 37% reporting delays of several days. The same figures for goods entering the EU from Britain were 45% and 28%, respectively (Financial Times, 2021).
Hence, our applied forecast rates to UK port constituents follow the Border Operating Model closely. This model is derived from Border Control requirements from 1 January 2021 for EU goods, which states that there are essentially three phases split between two timelines – before and after 1 July 2021 (Institute of Export, 2021). From 1 of July, all goods will require Full Customs declarations at their import point. Sanitary and Phytosanitary (SPS) checks will also begin at the designated Border Control Posts (BCPs) port.
The UK Office of National Statistics (ONS) has released the latest indicators for the economy, citing an approximate drop of -15% in shipments across UK ports. We agree a revenue decline of a similar magnitude for 2021 for UK ports as firms struggle in an already difficult situation that has now been made worse by Brexit. In the intermediate to long term, assuming considerable vaccination success, we expect EU/UK trade to stabilise and that trading picks up as global trade recovers.
4.3 IC6040/60 Rail and Urban Commuter Companies
Q1 2021: We have adjusted our forecasts for the current quarter for some rail constituents, given the implications of recent developments.
We made revisions to our forecasts for UK constituents in the light of the government’s plan to lift lockdown by mid-year.
We made no revision to the rest of the constituents. We calculate that our Q4 2020 basis remains appropriate based on the latest Mobility trends from Apple Maps application data (Apple, 2020). Airport passenger traffic flows did not show significant changes, thus not materially affecting our forecasts for the airport rail link constituents.
4.4 IC6050 Road Companies
Q1 2021: In Europe, the revenue forecast for 2021 is down by an additional -5% compared with Q4 2020. This is mainly due to the third wave of Covid-19 that began early in the year, which has led to new lockdowns and travel restrictions in most European countries, adversely affecting revenue generation.
While road concessionaires receiving availability or performance-based revenues face minimal impact from these new lockdowns, merchant road companies (BR-20, IC6050) that generate revenue from toll or shadow toll collection are impacted. Although Heavy Goods Vehicles (HGVs) traffic has been robust (Johnson, 2020), passenger vehicles have decreased as evidence by traffic data: we expect declines in revenue in the 3-30% range based on recent traffic data with reference to outlook done by S&P Global (S&P Global, 2021) and Fitch Ratings (Fitch Ratings, 2021). According to rating agencies, these issues may persist until the middle of 2022 (Fabrizio, 2020).
In the US, the expected decrease in revenue for 2021 has worsened by 15% compared with Q4 2020 to 25%. Like Europe, the US has also experienced a fresh wave of Covid-19 that began early in the year. According to the mobility indicators produced from Google Maps application data, traffic volume has decreased by more than 40% compared with the pre-Covid period (Google LLC, 2020).
We have revised the revenue forecast for 2021 for Chile to -15% compared with -25% in Q4 2020, in line with constantly improved traffic since the beginning of the year.
In Malaysia, revenue is expected to decrease by 10%, compared with Q4 2020, to 30% due to the Movement Control Order imposed recently, which significantly restricts mobility.
We keep our revenue forecasts unchanged for all other affected countries: Australia, Brazil, and the Philippines, as subsequent changes in government measures and the Covid-19 situation are in line with our expectations.
5. IC70 Renewable Power
Q1 2021: In 2020, the Covid-19 pandemic and economic recession severely impacted the energy sector as a whole. Global energy demand was hit due to major disruptions to business and lockdowns. It ultimately led to a decline in global energy price affecting revenue for power generators. Despite this, the renewable energy sector has emerged largely unscathed in terms of revenue.
On the supply side, renewable growth will accelerate due to its cost competitiveness over fossil fuel and strong policy support worldwide. In Europe, one-third of the EU Recovery Fund has been allocated to green investments, combined with ambitious 2030 objectives for green hydrogen (S&P Global, 2020). In the US, the new administration plans to execute on a platform that includes rejoining the Paris Climate Accord, investing USD2 trillion in clean energy, and fully decarbonising the power sector by 2035 in order to achieve a larger goal of net-zero carbon emissions by 2050 (Deloitte, 2020).
On the demand side, global power demand is expected to increase by 3% in 2021 (IEA, 2020), although further extensions of lockdown periods would impact demand and lead to an oversupply of electricity in the grids, thus impacting its price.
We do not expect a return to the levels of 5-8% decline in revenue we experienced in 2020 for renewable energy producers with a merchant business model (BR-20). There should be minimal impact on revenue in 2021 for the renewable energy sector.
Our Q1 2021 revenue projections for IC70 companies is unchanged from our Q4 2020 assessment.
6. IC80 Network Utilities
Q1 2021: Most of Europe is still experiencing spikes in coronavirus cases, and lockdown measures remain in place. England was on national lockdown for most of Q1 2021. Although the UK has committed to the vaccine rollout, in light of the multiple new variants on the watchlist for UK’s coronavirus strains and the likelihood of social distancing measures re-tightened, we estimate that network utilities revenue will decline 4% until Q3 and remain at 0% growth until the end of the year. For Italy, drawing from the grid demand trend (Terna, 2020), the electricity grid saw a year-on-year decrease of 5.3% compared with December 2020 with the same month in 2019. Another strict national lockdown is likely to occur in Italy this year (Bloomberg, 2021), and we estimate a revenue decline of 6% until Q3 and remain at 0% growth until the end of the year. In Spain, the water operators’ association has reported a fall in water consumption ranging between 13% to 15% over Q2 and Q3 in 2020 (Global Water Intelligence, 2020). We estimate a revenue decline of 14% until Q3 and then 0% until the year-end.
During the level four alert period, New Zealand’s daily electricity demand was at 11% lower than the historical record (Ministry of Business, Innovation and Employment, 2020). In the past three quarters, New Zealand has reported very few new coronavirus cases but the government will likely continue to implement snap lockdown measures to prevent clusters from forming. Nevertheless, the utilities sector in New Zealand is expected to recover fast, and we expect it to reach and maintain pre-pandemic performance by the end of 2021.
In Brazil, social distancing measures have severely decreased energy consumption and increased the risk of defaults on payments. We apply a forecast of -13% growth until Q3 and then 0% growth until the year-end.