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 funds 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.
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 near 29% discount after this week’s fall, adding 0.9p to NAV per share by doing so.
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.
