HICL Infrastructure update covers Affinity Water Ofwat proposal

HICL has published an interim update statement, covering the period from 1 April 2024 to 24 July 2024. It says that it is on track to deliver its target 8.25p dividend for the year.

The revolving credit facility (RCF) was repaid in May 2024 and the company began a £50m buyback programme. 7,050,000 shares have been bought back so far. However, the discount is still 21.2%, so there is more to do.

[One investment that I have been uncomfortable with for a while is Affinity Water. On this, HICL says:]

Ofwat published its draft determination for PR24 (2025-2030) for Affinity Water in the period:

• Overall, the draft determination reflects several positive movements by Ofwat. This suggests that, with some further discussion with Ofwat between now and December, Affinity should ultimately receive a balanced final determination that allows for the resumption of dividends for Affinity over AMP8 (asset management plan 8 – the new five-year business plan for the water companies that is set in agreement with Ofwat, the regulator).
• The allowed WACC of up to 3.72% (expressed in real terms) has increased from Ofwat’s ‘early view’ of 3.29% and the return on equity has increased to 4.8% from 4.1%.
• Ofwat has proposed a new intervention on gearing above 70%, which may impact the level of yield over AMP8, if retained in the final determination.
• As is typical at this stage, there are differences in the draft determination versus Affinity’s proposal, particularly around allowed expenditure, and these will be negotiated with Ofwat. Affinity will submit its response in August 2024 and expects a final determination in December 2024.
• Previous disclosure that HICL would look to support Affinity’s growth plan for AMP8 with a c. £50m equity investment over the period, contingent on a fair final determination, remains appropriate.

[I cannot help thinking that the new government will encourage Ofwat to be a lot tougher on these companies than the last one was.]

There is a dispute over taxes on road tolls in France which affects HICL’s investment in the A63 motorway. Here it says: the Conseil d’Etat has agreed that the Conseil Constitutionnel will review the legal challenge against the new tax on long-distance transport infrastructure with a decision expected in September 2024. If the challenge fails the company expects any increase in costs to be compensated through higher tolls. Nonetheless, if the levy were to be imposed without a flow through into tolling, the impact on HICL’s valuation would be immaterial.

HICL : HICL Infrastructure update covers Affinity Water Ofwat proposal