HICL Infrastructure 16 December 2022
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.
HICL’s investment proposition is to deliver sustainable income from a diversified portfolio of investments in core infrastructure.
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HICL Infrastructure (HICL) offers the prospect of steady, long-term returns with a link to inflation. It focusses on the highest-quality infrastructure assets that exhibit the most coveted investment characteristics and which sit at the lower end of the risk spectrum. As we highlight in the Dividend section, HICL aims to pay an attractive and stable level of dividend, which yields 5.1% at the current share price. The last few years have been amongst the most challenging in HICL’s life so far, but the recent interim results showed that HICL continues to deliver in a resilient manner.
HICL’s investment mandate allows for up to 20% of the portfolio to be invested in demand-based assets which not only tend to have higher linkages to inflation, but also have an element of linkage to GDP. It is these assets that were negatively affected by pandemic travel restrictions, but as the interim results highlighted, they are continuing to recover in line with, or ahead of, management expectations. Otherwise, the financial year so far has been a relatively eventful period for HICL in terms of investments, with the managers having announced four significant acquisitions totalling £616m. The effect of these new investments has been to extend the weighted average life of the portfolio from 30 years, as at 31/03/2022, to 33 years, as at 30/09/2022.
HICL’s returns have a linkage with inflation of 0.8, meaning that for a 1% increase in inflation for all future periods, the overall returns of the portfolio will increase by c. 0.8%. As the interim results highlighted, inflation is starting to drive returns within the portfolio, with the total NAV returns of 6.7% over the six months to 30/09/2022 significantly exceeding the discount rate, principally because of higher inflation.
The managers have been very active this year and HICL has a healthy, committed pipeline of investments. Aside from broadening the exposure of the portfolio, another positive effect from this activity is that the weighted average life of the portfolio has been extended from 30 years, as at 31/03/2022, to 33 years, as at 30/09/2022. In our view, this further boosts the resilience of the portfolio and shareholder value.
With a dividend target of 8.25p for the current financial year, as well as for the financial year ending 31 March 2024, HICL offers a prospective yield on the current share price of 5.1%. Cash cover of the dividend was negatively impacted by COVID lockdowns but as these assets recover, cash cover has continued to improve, with the managers reporting cash cover of 1.03 times for the six months to 30/09/2022.
As at 30/09/2022, HICL had net cash of £79m, representing 2.4% of net assets. HICL had a total of £713m available on its revolving credit facility (RCF), giving it plenty of firepower for the committed investments of £583.5m. In the interim results’ presentation, the managers commented that the RCF has since been partly drawn down to fund the Aotearoa Towers’ transaction. Depending on equity market conditions, this may suggest that HICL will look to raise further equity capital if market conditions improve.
In our view, HICL offers an uncorrelated return stream over the medium and long term which should have enduring appeal for long-term investors. The trust will be a direct beneficiary, in total return-terms, of any increase in long-term expectations for inflation, so investors may see the current discount to NAV of 2% as a potentially interesting entry point.
- Lower-risk, institutional-quality infrastructure assets within a liquid vehicle that has scale
- Steady and resilient yield, with dividend that is cash-covered
- Returns are positively correlated to inflation
- Demand-based assets do provide an element of correlation to economic activity
- Capital is at risk if the manager is unable to continue to extend the weighted average asset life
- Dividend cover is relatively low at 1.03x on a cash basis