HICL updates investors on impact of economic turmoil

HICL Infrastructure does not plan to publish its interim results until 23 November 2022. However, it is publishing an estimate of its end September NAV today and, given the economic and political backdrop, it is not bad news. The board expects to announce a moderate increase in the unaudited NAV of 1.2p to 164.3p.

The positive impact of higher inflation and deposit rates, in excess of HICL’s valuation assumptions as at 31 March 2022, and foreign exchange rate movements have more than offset the effect of higher discount rates assumed in all jurisdictions. The drivers of the expected increase in NAV are:

• operational performance in line with expectations;
• significantly higher actual and forecast inflation in all jurisdictions than was assumed at 31 March 2022, with UK RPI now assumed to be 10% in FY2023 and 5% in FY2024;
• increases to deposit rate assumptions in all jurisdictions due to higher prevailing interest rates;
• a significant weakening of Sterling against the US dollar; and
• significant increases in long-term government bond yields over the last six months, particularly in the UK where government bond yields increased sharply over the course of September,. This led to an increase in the portfolio’s weighted average discount rate to 7.1% (31 March 2022: 6.6%).

Breakdown of the movement in Net Asset Value per share

Discount rates

The investment manager’s view is that discount rates used to value projects do not follow bond yields on a like-for-like basis, although some correlation is evident over the longer term. As a result, when setting discount rates, the manager considers asset pricing observed in core infrastructure transactions across HICL’s key geographies, as well as the level of risk premium implied by movements in bond yields.

It reports that market activity has been muted over the last few months as transaction volumes are typically reduced over the northern hemisphere summer. As a result, relevant data points, reflective of the current market environment, to support core infrastructure discount rates are very limited. The company has therefore considered the significant increase in long-term government bond yields and the corresponding reduction in the implied equity risk premium over the last six months, and has increased the portfolio’s weighted average discount rate from 6.6% to 7.1%. The uplift is weighted toward the UK discount rate where government bond yields increased sharply over the course of September. The weighted average risk-free rate for the portfolio is 3.7% (31 March 2022: 1.8%) and the weighted average risk premium is 3.4% (31 March 2022: 4.8%).

InfraRed will continue to monitor market activity and will provide a further update as part of HICL’s interim results.

Foreign exchange

HICL is exposed to movements in Canadian dollars, the Euro and US dollars. Since 31 March 2022, Sterling has weakened materially against both the US dollar and the Canadian dollar. 48% of the Company’s exposure to foreign currency was unhedged as at 30 September 2022 giving rise to a valuation gain.

Funding position

At the end of the period, HICL had net cash of £79m (31 March 2022: net debt of £46m). HICL has £713m of available funding under its revolving credit facilit. It has £513m of investment commitments to fund over the second half of its financial year for: Aotearoa Towers, ADTiM and Texas Nevada Transmission.

Macro-economic assumptions used in the valuation

HICL updates investors on impact of economic turmoil