HICL Infrastructure 03 July 2024

HICL Infrastructure (HICL) provides a core investment exposure to institutional-quality infrastructure assets around the world. HICL’s managers have a 25-year track record, and this expertise is coming into play given equity fundraising is not possible with the current discount to NAV. To repay short-term borrowings in full, the team have successfully disposed of nine assets over the last financial year, all at a premium to valuations.

This active portfolio management, as well as the impact of higher inflation flowing through the portfolio, has meant that the board has been able to increase their dividend target to 8.35p per share for the financial year ending March 2026, representing an increase of 1.2% over that targeted for the current year. As we discuss in the Dividend section, HICL’s shares offer an attractive prospective dividend yield of 6.6%.

The increase in the dividend target is one benefit, but there are several other positives from changes made to the portfolio. Sales proceeds represent an average 11% premium to NAV, and in the context of the discount to NAV of c. 21%, this clearly highlights a disconnect between private and public markets. Further to this, realisation activity has left the HICL board confident enough to announce a £50m buyback programme, as we discuss in the Discount section.

For the first time, the managers have split the portfolio into two categories comprising “yield” and “growth” assets. Realisations and new investments have changed the make-up of the portfolio, improving the portfolio’s yield profile, yet also boosting exposure to growth assets which should deliver higher cashflows longer into the future. Yielders (represented predominantly by PPPs) amount to c 65% of the portfolio, but the balance, the growth assets, should enable HICL to continue to grow the dividend and asset base long into the future.

The prospect of resuming an upward trajectory on the dividend front is to be welcomed. Yet we also believe that the sales of assets at a premium to valuations should help shareholders and prospective investors gain further confidence in the NAV. According to InfraRed statistics, the market-implied net return (i.e. the NAV discount rate, less ongoing charges and adjusted for the discount to NAV) is 9.0% per annum, which in absolute and relative terms, is attractive compared to long-term equity market returns.

As we discuss in the Portfolio section, the portfolio continues to evolve. Aside from improving the mix, gently moving towards a portfolio more exposed to inflation, there are some company-specific opportunities that give HICL potential upside. Affinity Water is potentially one of them, but so too in our opinion (albeit less immediate) is the prospect of more train companies running services along HICL’s HS1 route.

Whilst it is hard to pin down a single catalyst that will deliver a rerating, there are a number of tailwinds we see appearing which could help HICL’s shares recover their poise. These include interest rates falling, Affinity Water’s regulatory determination allowing it to resume dividends as expected, dividend cover improving and the commensurate potential for the dividend to increase at a faster rate, and finally the share buyback recently started beginning to bite on the rating.