Outlook remains positive despite modest returns for HICL Infrastructure

HICL Infrastructure (HICL) has announced its annual results for the year ended 31 March 2023. The company delivered a total shareholder return of 1% for the year with an increasing discount rate offsetting steady earnings growth. Despite the middling returns, the company did highlight a number of positive updates for the year, noting the significant progress made on its strategy with a combined £736m of accretive transactions announced in the year. These included:

• £509m of asset divestments, at a weighted average 11% premium to carrying value, adding c. 2.5p to HICL’s NAV per share; and
• £227m of targeted investments in three assets, adding c. 0.7p to NAV per share.

It also noted the robustness of its NAV by selling 13.5% of the portfolio at or above carrying value. Proceeds from the divestments enabled the company’s RCF to be repaid in May 2024, down from a peak of £494m in April 2023 and a £50m share buyback programme.

Commenting on the performance, chair Mike Bane noted:

“With the uncertain macroeconomic backdrop persisting, the board and investment manager prioritised balance sheet management and disciplined capital allocation in the year. The acceleration of HICL’s strategic asset disposal programme, generating over £500m of proceeds, will enable the complete repayment of HICL’s Revolving Credit Facility and the launch of a £50m share buyback. These are responsible, long-term decisions which have created value and demonstrate the board’s approach to capital allocation.

“HICL’s diversified portfolio of high-quality core infrastructure assets is, by design, substantially insulated from market volatility and performed in line with expectations during the period. Despite this, the company’s shares have traded at a significant discount to their NAV. The board and investment manager have been aligned in their view that sustained transaction activity is fundamental to demonstrating the robustness of the company’s valuation. With this in mind, HICL disposed of nine assets, all at or above carrying value and representing 13.5% of the opening investment portfolio by value. The most recent was Northwest Parkway in February 2024 at a 30% premium to its most recent valuation. These transactions reinforce the board’s conviction that the company’s stock remains materially undervalued.

“The share price at 31 March 2024 implies a long-term expected return from the portfolio of 8.9% p.a. net of costs, representing a 4.8% implied equity risk premium which has widened by 60bps since the company’s interim results at 30 September 2023. The board believes this represents compelling risk-adjusted value, as demonstrated by its commitment to undertake up to £50m in share buybacks over a 12-month period.”

Regarding the outlook, he continued:

“The board and Investment manager’s disciplined approach to balance sheet management has provided a platform from which HICL can execute its strategy with flexibility and enhanced financial firepower.

“The growth potential in the infrastructure sector, particularly in those areas that support the modern economy, is considered vast. Alongside HICL’s resilient concession-based portfolio, more recent growth-oriented investments enhance the  company’s long-term earnings drivers and provide greater potential for outperformance through active management.

“Driven by the Manager’s proven ability to consistently realise investments at attractive valuations, the company expects to continue to progress strategic and accretive asset rotation. Prevailing market dislocation is anticipated to provide opportunities to further enhance portfolio construction and generate shareholder value through selective investments, without recourse to equity markets.

“HICL’s diversified portfolio of over 100 high-quality, inflation-linked assets reflects the evolution of the core infrastructure market – offering shareholders attractive risk-adjusted value for today, with exposure to the powerful infrastructure megatrends driving the returns of tomorrow.”

HICL : Outlook remains positive despite modest returns for HICL Infrastructure