HICL Infrastructure 15 January 2025
Disclaimer
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 Infrastructure (HICL) provides shareholders with exposure to a portfolio of equity investments in private infrastructure assets around the world. HICL is a long-term investor, but the managers have tended to realise at least one asset from the portfolio per year on average to optimise the portfolio, while it is also accretive to NAV returns. With the rise in interest rates since 2022, the managers have used sale proceeds to repay the company’s short-term floating rate borrowings, which was achieved this year. HICL therefore has a strong balance sheet, evidenced by the £50m share buyback programme which is currently in progress. Going forward, new and incremental investments will be weighed against additional share buybacks.
Whilst transaction volumes in private infrastructure assets remain muted, we think HICL’s own transactions amounting to £509m of sales over the last 18 months at or above carrying value should give confidence in HICL’s NAV. But this also highlights the continued disconnect between public and private markets, with HICL’s current discount to NAV of 30% (see Discount section).
As we discuss in the Portfolio section, the manager has been building out exposure to ‘growth’ assets, with the intention of extending the length of cash flows, whilst also allowing for capital growth as time goes on. With several projects performing in line, or ahead of expectations (and idiosyncratic issues with other projects being resolved), HICL's managers have increased their dividend guidance from FY26. The recent regulatory determination for Affinity Water, HICL’s biggest investment, was positive which provides further upward support to the dividend and cash cover going forward.
In our view, HICL’s discount to the peer group belies the optimistic tone in the interim results released in late November 2024, as well as the positive news from Affinity Water. HICL’s gearing has been reduced, and the board have plenty of flexibility to deploy capital in an accretive manner—either in InfraRed’s pipeline or in buybacks. The portfolio appears to be performing well, and aside from an adjustment on a sub-set of the PPP assets necessitating a higher discount rate, we think there are strong grounds to expect dividend cover to continue to improve and progressive dividends to resume.
The board have announced a £50m buyback programme, of which they have now completed over £37m. As well as boosting the NAV per share, this could help to narrow the discount. As we highlight in the Portfolio section, there are several strong narratives coming from the underlying companies, which if evidenced by dividend cover improving, could give solid grounds for more positive sentiment. Assuming HICL’s dividend guidance is successfully delivered, HICL’s correlation with long-term government bonds means that if long-term interest rates fall, the discount may start to narrow quite quickly.
However it happens, if the discount to NAV narrows, then shareholders will clearly earn a higher total return than that implied by the portfolio itself. At the current discount to NAV, buyers of HICL’s shares at the current price are locking in an attractive, inflation-linked yield of 7.6%, with potential for capital growth from the NAV and the discount narrowing. These may prove to be attractive in absolute terms and relative to long-term equity and bond market returns.
Bull
- Lower-risk, institutional-quality infrastructure assets within a liquid vehicle that has scale
- Steady and resilient yield, with a dividend that is cash-covered and potentially progressive
- Attractive prospective returns, positively correlated to inflation
Bear
- Evolution of the portfolio towards ‘growth’ assets is exposing shareholders to new risks
- Capital is at risk if the manager is unable to continue to extend the weighted-average asset life
- Dividend cover is still relatively low, at 1.07x on a cash basis