HICL Infrastructure 21 December 2021

HICL’s primary aim is to provide a sustainable and steady income stream, with low correlation to changes in GDP or equity markets. 2020 provided arguably the sternest test yet for HICL, with several of the largest assets being adversely affected by travel restrictions as a result of the COVID-19 pandemic. Dividend cash cover for the year to 31 March 2021 fell, but the payout to shareholders was unaffected, illustrating the resilience of HICL’s model to sudden shocks.

The majority of the portfolio is invested in PPP and regulated assets, which have been largely unaffected by COVID-19. However, it is the demand-based assets constituting 20% that have given an element of trouble. Happily, as discussed in Portfolio, it would appear that these assets are potentially on a path to recovery. The A63 in France is already operating above pre-COVID-19 levels, whilst Northwest Parkway is at 80% of pre-COVID-19 levels. HS1 is taking longer to recover, but the managers budget a return to 100% of pre-COVID revenues by March 2025.

Since launch, HICL has achieved NAV total returns of 8.9% per annum (to 30/09/2021). These returns have had a contribution from interest rates falling over the life of the trust. However, for the first time in many years, inflation could start to be a contributory factor in total returns. If inflation becomes persistent, this will potentially feed through into long term expectations rising, which would see a positive impact on NAV too.

Having paid an uncovered dividend last year, the six months to 30/09/2021 has seen revenues increase such that dividends were cash covered 1.02x. HICL currently offers a prospective dividend yield of 4.7%.

HICL has an attractive and diversified portfolio of private core infrastructure investments, all of which require a significant level of expertise to evaluate and manage. These assets also require an investment scale that HICL has, with £3bn of gross assets. HICL offers a liquid and simple way of accessing the asset class – and at a relatively low cost (see Charges).

Aside from the resilience shown by the portfolio during 2020, in our view, investors’ focus should be on the attractions of HICL’s link with inflation. If inflation was 1% higher in all future periods than the rates assumed in current valuations, the expected return from the portfolio (on a gross basis, before costs) would increase by 0.8% from 6.6% to 7.4%. The board and manager have not yet incorporated any change in long term inflation expectations into valuations. For those investors wishing to provide an explicit hedge to rising and persistent inflation, HICL is clearly a potential candidate.

At a dividend level of 8.25p, HICL offers a prospective yield on the current share price of 4.7%, which is attractive to many other income sources. This yield, hopes of further recovery in HICL’s demand-based assets, and the prospects of inflation benefitting total returns all explain the current premium to NAV of 12%. Uncertainty remains on the path of the recovery trajectory for HICL’s demand-based assets, but if the current trends continue, this will be a positive for shareholders.