HICL Infrastructure 14 February 2019
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by HICL Infrastructure. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
To deliver a long-term, stable income to shareholders from a diversified portfolio of infrastructure investments positioned at the lower end of the risk spectrum.
HICL Infrastructure Company
InfraRed Capital Partners
Association of Investment Companies (AIC) Sector
Sector Specialist: Infrastructure
12 Mo Yield
Dividend Distribution Frequency
Latest Market Capitalisation
Latest Net Gearing (Cum Fair)
Latest Ongoing Charge Ex Perf Fee %
Turnover Ratio %
(Discount)/ Premium % (Cum Fair)
Daily Closing Price
HICL offers shareholders an exposure to institutional quality, lower risk infrastructure assets. The manager, InfraRed Capital Partners, has an emphasis on achieving strong income returns, generated through sources as robust and diverse as possible. Certainly, with Carillion a relatively fresh memory, and with no corresponding adverse impact on the dividend paid by HICL, the diversified approach looks like it is, well… paying dividends.
The majority of the company’s assets offer predictable cashflows, and are uncorrelated to the economic cycle. The manager has been investing a greater part of the portfolio in demand-based assets, which can have returns more correlated to GDP and inflation, but also have a significantly longer life than traditional PFI / PPP assets. Whilst allocations to these types of assets have risen from 9% of NAV in March 2017 to 19% at the current time, the manager has a soft limit of 20% to ensure that the portfolio, as a whole, is largely uncorrelated with the wider market.
At the heart of HICL is a portfolio of investments with annuity-type income. As such, in our view, the longevity of the assets owned by HICL is important, given that at the end of each contract’s life there is a zero terminal value. The manager has been successfully extending the average portfolio duration over time. Indeed, over the year to 30 March 2018, the managers succeeded in increasing the weighted average asset life from 24.4 years to 29.5 years.
On a total return basis, HICL’s NAV return has outperformed UK equities since IPO, delivering a total return of 9.5% p.a. to 30 September 2018. The team performed a ten-year review of the various drivers of returns since inception to 31 March 2016. InfraRed believes that the NAV was ahead of forecast by 44.2p, of which 30p was due to “alpha” (or portfolio outperformance derived from the actions of the manager), and 14.2p due to “beta” (or economic factors such as a decline in corporate tax rates, and discount rates declining). The company continues to deliver solid and consistent positive returns. However, infrastructure investment risks, as well as the value of having an experienced manager behind the wheel, were shown in early 2018 with the insolvency of Carillion which in time (after the dust has cleared) is currently expected to have had an impact on NAV of around 1%.
Distributable income, net of costs, according to the manager, is expected to cover the dividend. The Carillion insolvency has meant that income from several of the related projects has been “locked-up” within the special purpose vehicles (SPVs) through which projects are held, which meant that dividend cover for the six months to 30 Sept 18 reduced to 1.06x (excluding the one-off impact of profits from disposals).
The twelve-year history of HICL illustrates why infrastructure investing has proven so attractive for long term investors – both in the consistency of returns, but also the lack of correlation to equity markets. In fact, the consistency of positive annual returns illustrates the parallel with the tortoise and hare. Over the short term, equity markets might easily show HICL a clean pair of heels, but over a cycle, HICL has proven itself an impressive adversary on a total return basis.
HICL suffered some negative share price pressure in early 2018, but Equitix’s unsolicited bid for John Laing Infrastructure catalysed interest once more. HICL has regained some of its poise in terms of rating, but the current share price premium of c 5% is below the average seen over a longer time frame. Certainly, the political situation will be holding some buyers back, but HICL remains the pre-eminent vehicle for investors to get access to lower-risk infrastructure assets.
Using the director’s valuation discount rate of 7.2%, we can estimate an IRR for HICL based on the current share price premium, of c 5.7%. This is the internal rate of return one might expect from HICL, if held to “maturity”. Deviations from this, could be a result of “alpha” delivered by the manager, the manifestation of portfolio risks (downsides) or changes to underlying valuation assumptions. According to the manager, the portfolio is most sensitive (in terms of a 50bps shift in the long-term rate) to changes in the discount rate and inflation assumptions.
|Lower risk, institutional quality infrastructure assets, within a vehicle that has scale
||Labour government could cause significant uncertainty
|Steady yield, with board guidance on dividends 2.5 years out
||Rising discount rates, in absence of inflation and / or increases in deposit interest rates, could limit manager’s ability to continue to deliver positive NAV progression
|Uncorrelated returns to equities, with long term IRR estimate of 5.7% at current share price
||Exposure to third party facilities management companies in event of their insolvency