Positive half-year results from HICL Infrastructure (HICL) underline why some shareholders in the £2.1bn investment trust object to its proposed merger with sister fund Renewables Infrastructure Group (TRIG).
Net asset value (NAV) per share rose by 2.9p to 156p in the six months to 30 September with the annualised underlying total return jumping to 10.3% from 5.5% a year ago.
The latest quarterly dividend of 2.09p leaves the alternative income fund on track to deliver its covered dividend target of 8.35p per share, while reiterating the intention to pay 8.5p per share in the year to March 2027.
Cash cover for the dividend improved slightly to 1.1 times from 1.07 in March supported by “good” inflation-linked revenue from its core public private partnership (PPP) assets in the first half of its financial year.
This excluded the sale of seven UK PPP assets in August for £225m in line with their March valuation which brought total disposals over two years to £725m and support a £150m share buyback programme.
HICL bought back £60m of its shares, which are cheap on a 30% discount after this week’s 7% fall, adding 0.9p to NAV per share during the six months. This morning they edged 0.6% higher to 109.9p.
The discount is the big fly in the ointment for shareholders, leaving them with a 15% loss over three years despite the portfolio of toll roads, railways, hospitals, schools and utilities generating a 30% total return over the same period.
In response, InfraRed fund manager Edward Hunt has been repositioning the portfolio, lowering short-duration PPP and healthcare assets and reinvesting in longer-duration earnings generating, growth assets.
Growth assets, which represent half of the portfolio following the recent disposals, outperformed, generating a 13.2% annualised return, a 7% increase on a year ago that was helped by favourable regulatory decisions on pricing for Affinity Water and Texas Nevada Transmission.
The company effectively cut its fund management charges by 12% from July by switching its annual payment to InfraRed from a percentage of gross assets to one that is half based on NAV and half on the market value of the shares. This means investors pay less because of the share price discount, which is only right given that is damaging their returns.
Chair Mike Bane said: “HICL’s ability to deliver on its strategy amid a challenging macroeconomic backdrop has been ably demonstrated in the period. With increasing dividend cash cover, NAV accretion and strong operational performance, the company is well positioned to deliver a compelling value proposition for shareholders.”
He said the current share price implied the portfolio could make a 9.7% annual return over 32 years. If the company can get that reflected in its shares, investors would be happy. The question is whether the proposed £5.3bn combination with TRIG achieves that.
Winterflood analyst Ashley Thomas said with around 80% of revenues regulated or availability based and a dividend yield of 7.6% HICL “should be sufficiently attractive on a stand-alone basis”.
Stifel analyst Iain Scouller agreed: “We think these results highlight the divergence in the performance of HICL and its proposed merger partner TRIG, which recently reported an NAV decline of -2.7% over the same six-month period.”
Our view
James Carthew, head of investment company research at QuotedData, said: “HICL’s results this morning underscore the arguments against the combination with TRIG. These were decent numbers, the pivot towards assets with the potential for capital growth – which is the strategy followed by the two best-performing infrastructure funds 3i Infrastructure (3IN) and Pantheon Infrastructure (PINT) – appears to be working. It is understandable that HICL shareholders are not keen to see that jeopardised.”
