Over the year-ended 31 March 2020, HICL Infrastructure (HICL) delivered an NAV total return of 1.9% (2019:10.8%). The company says that the target dividend of 8.25p has been declared and is fully cash covered. In terms of its balance sheet, over the year, HICL strengthened it by raising £117m in two capital raises while it also refinanced the RCF, with £321m of available drawings under the facility.
Operationally, HICL says that portfolio companies have been responding well to covid-19 challenges and supporting the public sector to keep essential infrastructure running smoothly, particularly within HICL’s healthcare PPP portfolio.
The following statements come from HICL’s manager, InfraRed.
Covid-19 came after regulatory uncertainty had eased following 24 months of uncertainty
“Underlying portfolio performance was solid in the year, with an annual return of 7.1% (including a value reduction taken on Affinity Water in September 2019). However, this was offset by a combination of external factors: the exceptional impact of covid-19 on demand-based assets, a reversal of planned decreases in UK corporation tax rates and reduced forecast deposit interest rates. NAV per share has consequently decreased by 5.2p to 152.3p at 31 March 2020 (2019: 157.5p).
The effects of systemic lockdowns continue to significantly impact usage of HICL’s GDP-linked demand-based assets. However, these assets are strategically important to their respective regions and well-positioned to benefit from the resumption of economic activity. A case study on these assets is set out in the full Annual Report and Accounts linked above (Section 3.4 – Valuation of the Portfolio). In the meantime, while economic uncertainty remains elevated, the Investment Manager supports the Board’s prudent approach to maintain the dividend at the current level.
Political and regulatory uncertainty, which had been impacting the UK infrastructure landscape for more than 24 months, has eased due to the decisive general election result and the conclusion of the water sector’s periodic Price Review in December 2019. The attractions of predictable, long-term cash yields from core infrastructure continue to attract institutional investors in the current environment. InfraRed continues to focus on investment discipline, and has cultivated a strong, well-diversified pipeline for HICL, which it is actively pursuing.”
Operational highlights from the year
PPP projects
“Public-private partnerships (PPPs) represented 72% of the portfolio by value, at 31 March 2020. These are contracts between the public and private sectors to facilitate the delivery of essential public infrastructure, such as school and hospital buildings.
In the year ended 31 March 2020, InfraRed completed HICL’s investment in the Blankenburg Connection, a road tunnel construction project in the Netherlands. While assets under construction represent a small part of the portfolio, c. 3% by value at 31 March 2020, InfraRed believes these types of investments provide an attractive opportunity for the manager to add value, by successfully completing construction and moving to the operational phase.”
Demand-based assets
“Investments where aspects of the revenue drivers are based on user demand accounted for 20% of the portfolio by value, as at 31 March 2020. The majority of these have revenues correlated to GDP, 18% at 31 March 2020.
The company’s two toll road investments, the A63 Motorway and Northwest Parkway performed well in the year, with traffic outperforming expectations for the first 11 months, ahead of the onset of the systemic lock-down conditions in March 2020 as a result of the Covid-19 pandemic. These conditions, which are persisting at the time this report, have significantly reduced usage of both toll roads.
HS1 also delivered revenue in line with expectations for the year, despite the impact of the Covid-19 pandemic during the final quarter. HS1’s contracted bookings for train paths provides significant mitigation to the short-term impacts of Covid-19 on the asset, however income from retail units and car parking has decreased significantly.
In January 2020, HS1 received the Final Determination on its five-year business plan for Control Period 3 from the Office of Rail and Road. This final determination was in line with expectations and, as previously disclosed, there was little impact on HS1’s financial performance, as costs are passed down to the train operating companies.”
Regulated assets
“Regulated assets, comprising both the Offshore Transmission assets (OFTOs) and HICL’s investment in Affinity Water, accounted for 8% of the portfolio by value, at 31 March 2020.
InfraRed completed two investments in OFTO assets for HICL during the year to 31 March 2020. These diversified the Company’s portfolio of regulated assets and further diversification will come with the completion of the Walney Extension OFTO, expected in 2020.
Affinity Water (6% of portfolio value at 31 March 2020) accepted the final determination (FD) from Ofwat on its business plan for asset management period 7 (April 2020 to March 2025) (AMP7), as the final step in the 2019 Price Review (PR19). The resolution of the PR19 process allows Affinity Water’s management team to focus on achieving the challenging operational efficiencies required for AMP7. A value reduction of £39.9m associated with the expected outcome of the FD was recognised at 30 September 2019 and has been maintained at the year-end.”
InfraRed’s outlook
“In the near-term, and particularly with respect to covid-19, we are focused on prioritising active management of HICL’s portfolio. Our asset management team is working in close partnership with both clients and key service providers to protect the service delivery of essential public infrastructure and preserve the value in HICL’s portfolio for shareholders.
With uncertainty stemming from covid-19 continuing to affect financial markets and society more generally, we are maintaining a cautious approach to assessing investment opportunities for HICL. Nonetheless, during the latter stages of the financial year we have developed an attractive pipeline of core infrastructure assets and continue to keep these under review.
Now, more than ever, the attractions of predictable, long-term cash yields from core infrastructure continue to appeal to institutional investors. Notwithstanding the impact of covid-19, the underlying portfolio continues to perform well in these conditions. Whilst those assets with demand exposure are undoubtedly affected by the unprecedented global restrictions on movement, they are well-positioned to benefit from the resumption of economic activity.
The longer-term future for infrastructure investment will also continue to generate opportunities for HICL, with Oxford Economics estimating that circa US$3.7tn must be invested in infrastructure globally every year to 2040, over US$1.3tn of which is accounted for by Europe, the Americas and Oceania. In developed markets this is required to sustain economic and population growth, taking the form of new investment and the upgrading of aging asset estates.”
HICL: Final results from HICL Infrastructure with long-term demand for infrastructure likely to remain robust