The Q2 2022 release of the EDHECinfra indices incorporates the views and asset-level revenue forecasts of our team of financial analysts. This report updates the Q1 2022 report and is presented following the TICCS® taxonomy of infrastructure companies. Each quarter, the team reviews the revenue forecasts of 700+ 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
Overview: EDHECinfra incorporates the inflation factor into revenue projections of infrastructure investments
Over the previous quarter, the rate of inflation increased. We have adjusted our inflation forecasts accordingly and take the view that inflation will remain elevated for the coming years, whilst central banks respond and other shocks to the global economies stabilise.
Our inflation adjustments vary according to each infrastructure’s exposure to different regional inflation rates as well as its business model.
For instance, we observe higher inflation in Europe, mostly due to the ongoing Russian war, while the Asia Pacific region is seeing expected lower inflation compared with the rest of the world.
Also, contracted (BR-20) companies typically benefit from contracts that are CPI/RPI indexed, allowing direct pass-through when rising inflation results in an increase in their revenue.
Adjustments to forecasts due to inflation were made where applicable, especially for the sectors highlighted below.
IC40 Energy and Water Resources
The Russian invasion of Ukraine has led to a squeeze in the oil and gas supply. This has resulted in a significant increase in energy prices and, ultimately, inflation. Increasing energy prices and inflation lead to increased operating costs.
However, given that this infrastructure sub-class business model is based on take-or-pay contracts, their operating costs are passed through to end consumers in the form of revenue. Hence, we have revised our revenue forecast growth rates upward to reflect the current energy and inflation climate.
IC6010 Airport companies
Airports are usually regulated to an extent such that regulators set the allowed returns for their aeronautical activities while non-aeronautical activities are not regulated. Usually, the allowed return includes an estimation of inflation. As such, aeronautical activities are exposed to inflation risk, of which we expect an upward adjustment to airport revenue.
The annual inflation rates of countries have also increased, reflecting the soaring oil and gas costs from Russia’s invasion of Ukraine (BBC, 2022).
Industry-wide revenue passenger kilometres (RPKs) in March 2022 were 41% below March 2019 levels (IATA, 2022) which is an improvement from the last quarter. Hence, we expect a gradual recovery in travel demand in 2022 and a recovery to near pre-covid levels in 2023.
IC6030 Port Companies
Container port throughputs have increased more than we had expected due to higher demand for imported goods from developed countries.
In addition, fuelled by increasing energy prices, global inflation rates have increased more than we had expected. Given that ports’ operating costs are passed through in the form of revenue, an increase in inflation rates would, in turn, increase revenue levels. As a result, we have revised upward our forecast growth rates for ports.
IC6050 Road Companies
Many road companies have concession agreements with inflation linkages that have an option to pass on increased expenses.
In Q2 2022, we have revised the revenue outlook for most road companies. This revision is mainly due to the increase in inflation rates. While post-pandemic demand drove the previous increase in inflation rates, the current strong inflation surge has become a mainstay of the global economic environment over the past few months, and is is largely due to the latest increases in food and energy prices and are at the same time associated with the economic impact from the invasion of Ukraine.
IC70 Renewable Power
According to the World Bank (2022), the increase in energy prices over the past two years has been the largest since the 1973 oil crisis due to the impact of the COVID-19 pandemic and Russia’s invasion of Ukraine. They added that energy prices are expected to rise more than 50 percent in 2022 before easing in 2023 and 2024. We decided to revise our revenue forecast this quarter for renewable energy constituents to reflect the above-mentioned factors. In our index, the revenue streams for the majority of renewable energy constituents are contracted; hence we do not expect revenue for these companies to rise in proportion with current energy price changes. Prices will instead increase by in step with the individual country’s CPI rate. Hence the forecast rate we use will be in line with the CPI rate of the countries the relevant assets are located in.
IC80 Network Utilities
In the current quarter, we have factored in increases in energy prices and inflation rates for the revenue forecasts across our utility network companies. In the UK, Ofgem has increased the April 2022 energy price cap by 54%. Under the current price cap scheme, UK utilities are permitted to pass on the increase in gas wholesale prices to their direct tariff customers (Ofgem, 2022). In April 2022, Spain and Portugal reported a year-on-year increase in gas and electricity CPI ranging from 19.4-34.9%. However, the European Commission has authorised an exceptional mechanism for Spain and Portugal to cap the wholesale electricity market price to cushion the impact of rising electricity bills for customers. This mechanism is currently applicable from May 2022 to May 2023 (European Commission, 2022). The existing or new policies and mechanisms determine whether the rise in wholesale and other costs can be passed on to consumers in the form of utility bills or if the impact on bills is cushioned for customers. The forecast rates we use consider prevailing government measures and bills in place for the states and countries covered by EDHECinfra, CPI for all items, CPI rates pertaining to the different industrial subclasses such as electricity, gas or water and other fuels, the proportion of customers affected by tariff increases as well as the historical performance of each company.
Across the water utilities of the various countries we cover, we have generally applied the increase in water supply CPI, which is comparably less than the CPI changes reported for other energy fuels, onto forecasted revenues. We also take into consideration any changes in existing water tariffs reported by the various regulatory agencies. We continue monitoring the invasion of Ukraine and the responses from the various countries and their impact on the utility network industry.