HICL Infrastructure 13 August 2020

HICL offers exposure to institutional-quality, lower-risk core infrastructure assets, aiming primarily to provide a steady, sustainable income stream with low correlation to GDP growth and equity markets.

HICL’s portfolio is diversified by asset type, sector and geography, meaning it has proved resilient through the COVID-19 crisis. However, 18% of the portfolio (three assets) has been impacted over the short term. These assets (plus a harsher regulatory determination for Affinity Water) meant the last financial year saw a meagre NAV total return of 1.9%.

Following the lockdown easings, HICL recently announced that of the demand-based assets, recent data for the two toll roads indicates a faster recovery from that assumed in the calculation of the 31/03/2020 NAV. Assuming no further lockdowns, this should positively impact returns going forward – through cash generation and valuation. The other asset (High Speed 1 in the UK) remains marginally behind the forecast. The manager remains mindful the recovery has a significant course to run and any restrictions to contain further pandemic waves would weigh on asset performance, as would deterioration in GDP forecasts for key demand-based assets’ jurisdictions.

Illustrating the strong income flow provided by HICL, in September this year IPO investors will have had their original capital (99.5p) back in dividends. The board has historically provided guidance for dividends up to two and a half years ahead. However, reflecting COVID-19 uncertainty, the board has revised its dividend guidance for the current financial year down from 8.45pps to 8.25pps, in line with the prior year. The board has not given guidance for the following year, but has promised to revisit guidance when things become clearer.

HICL is designed to be highly resilient and deliver strong income returns year in, year out. The COVID-19 crisis has meant the current-year dividend is likely to remain at the same level as last year. The recent Interim Update Statement is to be welcomed, as it points towards a faster recovery for two of the three demand-based assets that have been impacted.

Offering a dividend of 8.25p, HICL offers a prospective yield of 4.8%. This compares to global equity-income trusts’ historical yield of 4.4%. With significant clouds on the equity horizon, HICL’s yield – both in extent and solidity of the cash flows backing it – looks increasingly attractive in an environment in which the stability of income streams will become a key area of investor focus.

As we illustrate in the Portfolio section, there is visibility on cash flows for investors in HICL. Compared to many other investments elsewhere, a ‘held’ 2021 dividend will likely turn out to be bucking the trend when compared to global equities in our opinion.

Aside from two out of the three demand-based assets performing ahead of that modelled for the 31/03/2020 valuation, the manager has indicated that demand for yielding infrastructure investments remains high (as at 16/07/2020). The manager expects a lower discount rate may be introduced for the 30/09/2020 NAV calculation, which is likely to be announced in November. In this context a 14% premium to NAV looks acceptable for such solid investment attributes.