HICL Infrastructure 16 June 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 at the lower end of the infrastructure equity risk spectrum.
InfraRed Capital Partners
Edward Hunt; Keith Pickard; Chris Grill; Stewart Orrell; Werner Von Guionneau;
Association of Investment Companies (AIC) Sector
12 Month Yield
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HICL Infrastructure’s (HICL) investments are unlisted and offer the prospect of steady, long term returns with a link to inflation. It aims to provide a sustainable and steady income stream with a low correlation to changes in GDP or equity markets from a portfolio of core infrastructure assets. Since launch, NAV total returns of 9% per annum have been achieved (to 31/03/2022), comfortably outpacing UK equity markets over the same period and over the past five years.
Aside from the high income that HICL offers to shareholders (dividend yield of 4.7%, see Dividend section), one of the key selling points for investors has been the link with inflation. With inflation is becoming increasingly prevalent, following the publication of HICL’s final results. In the Portfolio section we examine the different elements of the trust’s portfolio, in the context of an era of higher inflation.
HICL’s managers have stated that in their view, the trust has “strong inflation correlation”, effectively a direct contractual link to project revenues, although as we discuss not necessarily directly linked to immediate cashflows. They have stated that, in a scenario where inflation was 1% higher than currently assumed in all future periods, HICL’s annual exected total (gross, before fee) returns would increase from 6.6% to 7.4%. If short term inflation expectations are exceeded, a 300bps increase over one year would result in a 3.6p increase in NAV per share.
HICL offers a prospective yield on the current share price of 4.7%. Covid lockdowns impacted some of HICL’s largest assets. According to the company, these assets continue to recover and this, together with the inflationary backdrop, mean that dividend cover should continue to rise.
With inflation increasingly being felt across markets and economies, HICL could be a contender for investors wishing to reposition their portfolio to this new reality. As we discuss in the Dividend section, HICL’s cashflows and NAV have already benefitted to an extent from higher levels of inflation.
However, the board and manager have not yet incorporated significant changes to long term inflation expectations into valuations. This means that if inflation does become entrenched at a higher level than currently assumed – even into next year – there is potential upside for investors in terms of the NAV as well as potentially dividends, as dividend cover starts to rebuild. That said, it will take time for revenues to start to reflect contractual inflationary increases.
For those investors wishing to access an investment expected to benefit from rising and/or persistent inflation, HICL is clearly a strong candidate. With HICL’s returns having 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%), HICL should in our view be a consideration for investors wanting to tailor their portfolios towards a new, higher inflation era. The current share price premium to NAV of 7.9% compares to the five-year historic average of 7.5%, suggesting the market is not yet pricing in a significantly higher inflation than the assumptions underpinning HICL’s NAV (see the Portfolio section for more detail).
- Lower-risk, institutional-quality infrastructure assets within a liquid vehicle that has scale
- Steady and resilient yield, proven defensive qualities during 2020 Covid-19 crisis and so far this year, with dividend that is cash covered once again
- 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 covered is relatively low at 1.02x not including accretive sales