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Affinity Water disappointment for HICL investors

Affinity Water disappointment for HICL investors – In a difficult year for infrastructure, HICL Infrastructure (HICL) reported that its return on NAV was 5.7% over the company’s financial year to 31 March 2018. The share price, however, returned -15.5% on a total return basis.

The NAV edged up from 149p to 149.6p, helped by issuing stock at a premium to asset value. Total dividends of 7.85p were in-line with guidance from the company. They were 88% covered by EPS of 6.9p (1.10x covered by net operating cash flows), with FY19 and FY20 targets reaffirmed at 8.05p and 8.25p respectively.

Performance

Harry Seekings, director of HICL’s investment adviser pointed out that the portfolio’s performance as a whole, combined with the issuance of new equity at a premium in June 2017, helped the company to deliver NAV growth over the year. These factors largely offset the financial impact of the Carillion liquidation and other factors including the impact of regulatory and operational challenges that impacted the valuation of Affinity Water.

Incremental value was generated from operational outperformance across various cost saving and efficiency initiatives, as well as higher actual UK inflation on average running above the 2.75% p.a. forecast (returns from PPP projects are often inflation linked), though these were mostly negated by an adverse valuation movement on Affinity Water.

Affinity Water

HICL invested £250m in Affinity Water in a transaction that was announced in April 2017. It has just written the value of this investment down by £34m. This is not a good result and reflects, say Infrared, aspects of OFWAT’s 2019 Price Review, including a switch from RPI to CPI as a measure of inflation and a lower than expected regulatory weighted average cost of capital, and the impact of a drought, freezing pipes in the winter and the replacement of a sub-contractor. Affinity Water has also said that it will be harder for it to extract efficiency gains from its capital expenditure programme.

Carillion

Following Carillion’s failure, for the ten PPP projects in the HICL portfolio where Carillion was providing facilities management services, responsibility for sourcing credible replacement subcontractors has fallen squarely onto the company and its co-investors. On 15 January 2018, HICL recognised a reduction in value of GBP59.3m in respect of the affected projects as at end December 2017 and a further reduction of GBP19m in the estimated market value of the affected PPP projects as at 31 March 2018. The managers reviewed and re-confirmed the value reduction of Carillion recognised by the company as part of the valuation of the portfolio at 31 March 2018 and considering current information and progress to date. The hit to NAV was c2%.

HICL : Affinity Water disappointment for HICL investors

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