HICL Infrastructure 16 June 2021

HICL’s primary aim is to provide a sustainable and steady income stream, with low correlation to changes in GDP or equity markets. Over the last decade and a half, the trust has grown net assets to £3.0bn and in the process acquired a diversified portfolio of 116 institutional-quality, lower-risk core infrastructure assets (as at 31/03/2021).

The portfolio has largely proved resilient through the COVID-19 crisis. That said, the demand-based assets have been negatively affected by government restrictions on travel. As we discuss in Portfolio, two out of the three assets in this category are now on a path to recovery, which gives credence to the board’s guidance that the current financial year should see a covered dividend once again (see Dividend).

Private infrastructure investments require a significant level of expertise to evaluate and manage, and HICL offers a liquid and simple way of accessing the asset class at relatively low cost (see Charges). Over time the managers seek to improve the mix of assets within the portfolio to optimise returns, and prolong cashflows. It is noteworthy that the weighted average life of the portfolio's assets has increased to 29 years compared to 28 years at the time of HICL's IPO, despite the passage of over 15 years.

The dividend for the year to 31 March 2021 of 8.25p per share was cash covered only 0.9 times. We understand that the board and managers remain focussed on the continual improvement to the long-term sustainability of the dividend. The board has announced that the targeted dividend for the current financial year is expected to be fully cash covered.

HICL’s attraction is primarily as a prodigious payer of dividends. That the NAV has also grown strongly since IPO is reflective of InfraRed’s management but also declining interest rates around the world and strong demand for the types of assets that HICL owns. As the board highlights in the recent report and accounts, HICL pays comfortably the highest (cash) dividend amongst its core infrastructure peer group.

At 8.25p, HICL offers a prospective yield on the current share price of 4.8%. This compares to global equity-income trusts’ historical yield of 3.7%. With a dividend target from the board now extending two years out, HICL compares well on both the solidity and extent of its dividend.

HICL’s premium to NAV is currently higher than the five-year average premium of 8.6%. Yet, HICL’s premium rating is considerably lower (and in our view therefore more attractive) when viewed next to directly comparable peers BB Global Infrastructure (BBGI) and International Public Partnerships (INPP) which trade on premiums of 29% and 20% respectively. In our view, HICL’s lower premium reflects its exposure to demand-based assets, which have led it to pay an uncovered dividend last year. With economies experiencing a strong rebound in activity, we expect that the demand-based assets will contribute positively to cashflows and NAVs as time goes on. There remains uncertainty on one asset (High Speed 1) but, if international travel resumes ahead of expectations, this will be a positive for both the NAV and likely the rating of the shares.